##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For the fiscal year ended: December 31, 2004
 Commission File Number 1-1143 Inco Limited (Name of Registrant as specified in its charter)
 Canada(Jurisdiction of incorporation)
    
    98-0000676(I.R.S. Employer Identification No.)145 King Street West, Suite 1500
Toronto, Ontario, Canada(Address of principal executive offices)
    
    M5H 4B7(Postal Code)
 (416) 361-7511(Telephone number) Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the
Act): Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares
    
    New York Stock Exchange (1)Stock Purchase Rights
    
    New York Stock Exchange (2)Common Share Purchase Warrants
    
    New York Stock Exchange (2)
 The Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Act during the preceding 12 months, and (2) has been subject to such filing requirements for the
past 90 days. The Registrant is an accelerated filer (as defined in Rule 12b-2 under the Act). As of June 30, 2004, the approximate aggregate market value, based upon the closing sale price
of the Common Shares on the New York Stock Exchange, of the Registrants voting shares held by
non-affiliates was $6,471 million. (3) As of February 18, 2005, 188,169,875 Common Shares (including non-voting fractional interests
aggregating 4,830 Common Shares) of the Registrant were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants proxy circular and statement dated February 18, 2005 for the 2005
Annual and Special Meeting of Shareholders of the Registrant are incorporated by reference in Part
III of this Report to the extent set forth in Items 10, 11, 12 and 14 hereof.   (1)
    
    In addition, the Common Shares are listed on the Toronto Stock Exchange and are traded on
certain other exchanges principally through independent arrangements made by securities
dealers.(2)
    
    In addition, the Stock Purchase Rights and the Common Share Purchase Warrants are listed on the
Toronto Stock Exchange.(3)
    
    Unless otherwise stated, all dollar amounts in this Report are expressed in United States
currency.




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INDEX TO INCO LIMITED
2004 ANNUAL REPORT ON FORM 10-K UNLESS OTHERWISE STATED, ALL DOLLAR AMOUNTS IN THIS REPORT
ARE EXPRESSED IN UNITED STATES CURRENCY 
 TABLE OF CONTENTS  EX-10.KEX-10.LEX-10.MEX-10.NEX-21EX-23EX-24.AEX-24.BEX-31EX-32EX-99    Table of Contents  Items 1. and 2. Business and Properties of Inco Limited
    
    
    1Introduction
    
    
    1Availability of Documents
    
    
    2Cautionary Statement Regarding Forward-Looking Statements
    
    
    2Description of Business
    
    
    4Sales
    
    
    4Deliveries
    
    
    4Prices
    
    
    4Nickel
    
    
    4Copper
    
    
    5Other Metals
    
    
    6Results of Operations
    
    
    6Customers
    
    
    6Competitors
    
    
    6Inventories
    
    
    6Nickel Unit Cash Cost of Sales
    
    
    7Business Segment Information
    
    
    8Nickel
    
    
    9Applications for Nickel
    
    
    9Historical Review of the Nickel Industry; Recent Industry Conditions
    
    
    10Participants in the Nickel Industry
    
    
    14Incos Position in the Nickel Industry
    
    
    14Inco Special Products
    
    
    15Copper
    
    
    16Other Primary Metals and Related Products
    
    
    16Mining and Production
    
    
    17General
    
    
    17Capital Expenditures
    
    
    19Mining
    
    
    20Concentrating, Smelting and Refining
    
    
    23Ore Reserves and Mining Rights
    
    
    26Ore Reserves
    
    
    26Mining and Other Rights
    
    
    31PT International Nickel Indonesia Tbk
    
    
    34General
    
    
    34Contract of Work Extension and 1999 Expansion of Facilities
    
    
    35Operations
    
    
    37Sales
    
    
    38Goro Nickel S.A.
    
    
    38Goro Deposit
    
    
    38Ownership of Goro Nickel
    
    
    38Goro Project
    
    
    39Project Review Process
    
    
    39Fiscal Regime
    
    
    40Girardin Act Financing
    
    
    40New Caledonia
    
    
    41Prony West Deposit
    
    
    42Voiseys Bay Nickel Company Limited
    
    
    42Voiseys Bay Deposits
    
    
    42Environmental Review Process
    
    
    42
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Negotiations with Aboriginal Groups
    
    
    43Negotiations with the Provincial Government
    
    
    44Project Phases
    
    
    452002 Asset Impairment Charge
    
    

    45Exploration and Mine Development
    
    
    45Research and Development
    
    
    50Metals Recycling
    
    
    51Environment, Health and Safety
    
    
    51Environmental and Health and Safety Management Systems
    
    
    51Environment, Health and Safety Audits
    
    
    52SO2 Emissions
    
    
    52Port Colborne and Sudbury Soils
    
    
    54Decommissioning and Reclamation
    
    
    57Re-vegetation Programs
    
    
    57PT Inco
    
    
    57Future Removal and Site Restoration; Closure and Post-Closure Plans
    
    
    58Health and Safety
    
    
    60Regulation of Nickel and Other Nonferrous Metals
    
    
    62Other Environmental Control Regulations
    
    
    70Employees
    
    
    71Miscellaneous Investments
    
    
    71Exmibal
    
    
    71Other Information
    
    
    71Shareholder Rights Plan
    
    
    72Item 3. Legal Proceedings
    
    
    73Item 4. Submission of Matters to a Vote of Security Holders
    
    
    73Executive Officers of Inco Limited
    
    
    74Item 5. Markets for Inco Limiteds Common Shares, Related Shareholder Matters
and Inco Limiteds Issuances or Purchases of Equity Securities
    
    
    75Common Shares
    
    
    75Market Information
    
    
    75Holders of Common Shares
    
    
    75Dividends
    
    
    75Common Share Purchase Warrants
    
    
    75Other Information
    
    
    76Class VBN Shares
    
    
    76Preferred Shares
    
    
    77Certain Provisions of the Preferred Shares as a Class
    
    
    77Series E Preferred Shares
    
    
    78Securities Authorized for Issuance Under Equity Compensation Plans
    
    
    78Other Information
    
    
    78Item 6. Selected Financial Data
    
    
    80Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    82Overview
    
    
    82Nature of our Business
    
    
    82Key Factors Affecting our Business
    
    
    822004 Highlights
    
    
    842003 Highlights
    
    
    86Results of Operations
    
    
    872004 Compared with 2003
    
    
    87Earnings Summary
    
    
    87Nickel Production
    
    
    88Copper Production
    
    
    88Net Sales
    
    
    88Realized Prices
    
    
    89Costs and Expenses/Other Income
    
    
    90
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Cost of Sales and Other Operating Expenses
    
    
    90Depreciation and Depletion
    
    
    90Selling, General and Administrative
    
    
    90Currency Translation Adjustments
    
    
    91Interest Expense
    
    
    91Asset Impairment Charges
    
    
    91Other Income, Net
    
    
    91Income and Mining Taxes
    
    
    91Minority Interest
    
    
    92Nickel Unit Cash Cost of Sales
    
    
    92Energy Costs and Relative Advantages
    
    
    93Intermediates Segment
    
    
    93Development Projects Segment
    
    
    932003 Compared with 2002
    
    
    94Earnings Summary
    
    
    94Nickel Production
    
    
    95Copper Production
    
    
    95Net Sales
    
    
    95Cost of Sales and Other Operating Expenses
    
    
    95Selling, General and Administrative
    
    
    95Research and Development
    
    
    96Currency Translation Adjustments
    
    
    96Interest Expense
    
    
    96Goro Project Suspension Costs
    
    
    96Other Income, Net
    
    
    96Income and Mining Taxes
    
    
    96Minority Interest
    
    
    97Nickel Unit Cash Cost of Sales
    
    
    97Energy Costs and Relative Advantages
    
    
    97Intermediates Segment
    
    
    97Cash Flows, Liquidity and Capital Resources
    
    
    982004 Compared with 2003
    
    
    98Operating Activities
    
    
    98Investing Activities
    
    
    98Financing Activities
    
    
    992003 Compared with 2002
    
    
    100Operating Activities
    
    
    100Investing Activities
    
    
    101Financing Activities
    
    
    101Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
    
    
    102Contractual Obligations
    
    
    102Contingencies and Guarantees
    
    
    103Derivative Instrument Positions
    
    
    103Other Off-Balance Sheet Arrangements
    
    
    106Risks and Uncertainties
    
    
    107Market Risk
    
    
    107Metals and Commodities Risk
    
    
    108Foreign Exchange Risk
    
    
    110Interest Rate Risk
    
    
    111Counterparty Risk
    
    
    111Environmental Risk
    
    
    112Other Risks and Uncertainties
    
    
    114PT Inco
    
    
    114Risks Associated with, and Importance of, Future Low-Cost Nickel Projects
    
    
    115Uncertainty of Production and Capital and Other Cost Estimates
    
    
    116Goro
    
    
    116
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Operations
    
    
    117Voiseys Bay
    
    
    117Construction Risks and Technological Risks
    
    
    117Governmental Regulations
    
    
    118Capital Requirements and Operating Risks
    
    
    118Labour Relations
    
    
    119Uncertainty of Ore/Mineral Reserve Estimates
    
    
    119Sensitivities
    
    
    120Critical Accounting Estimates
    
    
    121Depreciation and depletion
    
    
    122Impairment
    
    
    122Asset Retirement Obligations
    
    
    124Future Employee Benefits and Costs
    
    
    125Income and mining taxes
    
    
    126Accounting Changes
    
    
    126Outlook
    
    
    127Operations
    
    
    1272005 Planned Capital Expenditures
    
    
    127Nickel Market Conditions
    
    
    128Non-GAAP Financial Measure
    
    
    128Other Information
    
    
    129Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    130Item 8. Financial Statements and Supplementary Data
    
    
    131Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    181Item 9A. Controls and Procedures
    
    
    181Item 10. Directors and Executive Officers of Inco Limited
    
    
    182Item 11. Executive Compensation
    
    
    182Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    182Security Ownership of Certain Beneficial Owners and Management
    
    
    182Changes in Control
    
    
    182Item 13. Certain Relationships and Related Transactions
    
    
    182Item 14. Principal Accountant Fees and Services
    
    
    182Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    183Signatures
    
    
    185Consent of Independent Accountants
    
    
    187
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PART I 
 Items 1. and 2. Business and Properties of Inco Limited 
 Introduction Inco Limited (Inco, the Company, we or us) was incorporated in 1916 under the
laws of Canada, succeeding a business established in 1902. In 1979, Inco was continued by articles
of continuance under the Canada Business Corporations Actand is governed by that Act. Our
executive offices are located at 145 King Street West, Suite 1500, Toronto, Ontario, Canada M5H
4B7. Unless the context otherwise requires, all references in this Report to Inco, the
Company, we, our or us include all of its consolidated subsidiaries, unincorporated units and
divisions. Inco is one of the worlds premier mining and metals companies. We are a leading producer of
nickel, a hard, malleable metal which, given its properties and wide range of applications, can be
found in thousands of products. We are also an important producer of copper, precious metals and
cobalt and a major producer of value-added specialty nickel products. We also produce sulphuric
acid and liquid sulphur dioxide as by-products from our processing operations in Sudbury, Ontario.
Our principal mines and processing operations are located in the Sudbury area of Ontario, the
Thompson area of Manitoba and, through a subsidiary in which we have an equity interest of
approximately 61 per cent, PT International Nickel Indonesia Tbk (PT Inco), on the Island of
Sulawesi, Indonesia (see PT International Nickel Indonesia Tbk below). We also operate
additional wholly-owned metals refineries at Port Colborne, Ontario and in the United Kingdom at
Clydach, Wales and Acton, England. We also have interests in nickel refining capacity in the
following Asian countries: in Japan, through Inco TNC Limited (ITL), in which we have an equity
interest of 67 per cent; in Taiwan, through Taiwan Nickel Refining Corporation (Taiwan Nickel),
in which we have an equity interest of 49.9 per cent; and in South Korea, through Korea Nickel
Corporation (Korea Nickel), in which we have an equity interest of 25 per cent. Additionally, we
have a 65 per cent equity interest in Jinco Nonferrous Metals Co., Ltd. (Jinco), a company that
produces nickel salts in Kunshan City, Peoples Republic of China (China). We have also expanded
our joint venture operations in China, through the formation of a new company, Inco Advanced
Technology Materials (Dalian) Co., Ltd., in which we have an equity interest of 76.7 per cent.
This venture produces nickel foam products for the Asian battery market. In early March 2005, we
completed the acquisition of substantially all of the assets representing the nickel foam business
of Shenyang Golden Champower New Materials Corp., a leading Chinese producer of nickel foam.
Pursuant to the terms of this acquisition, we will have a 77 per cent interest in the company
formed to hold the acquired assets. In 2004 we also established a shearing and packaging
operation in China for certain nickel products to service the specific needs of this market. As part of our strategy to be the worlds lowest cost and most profitable nickel
producer, we are currently developing two major new or greenfield projects, our wholly-owned
Voiseys Bay nickel-copper-cobalt project in the Province of Newfoundland and Labrador, Canada and
our Goro nickel-cobalt project in the French overseas territorial community (collectivité
territoriale) of New Caledonia (New Caledonia) in which we currently hold approximately a 90 per
cent interest following the capitalization of certain shareholder advances in late February 2005. As discussed under Goro Nickel S.A. below, in December 2002 we suspended construction of the
Goro nickel-cobalt project and initiated a comprehensive review of the project following the
receipt of information from the engineering firms that had been providing engineering, procurement
and construction management services to the project which, if confirmed, indicated an unacceptable
increase in the capital cost estimate for the project of 30 to 45 per cent above the projects then
current capital cost estimate of $1,450 million. This review evolved into two phases during 2003.
Phase 1 of this review focused on an orderly suspension of work and identification of opportunities
for capital cost reduction. In August 2003, the Company announced the key results of Phase 1 of
the review process and that it was moving to Phase 2. Phase 2 of the review was intended to
involve a structured process to (i) further develop the capital cost reduction opportunities
identified in Phase 1 and (ii) establish a capital cost control estimate, an updated project
schedule and an optimized and clearly defined scope and execution plan for the project. In late
May 2004, we announced the key preliminary findings reached to that date as part of Phase 2 of the
review. These findings included (i) an updated preliminary capital costs estimate, taking into
account an expected non-cash charge, of approximately $1.85 billion for the projects planned mine,
process plant and related infrastructure, within a minus five per cent to plus 20 per cent
reliability range and (ii) changes in the planned Goro project configuration, moving to direct
heating of the ore feed and other changes intended to reduce the capital cost estimate and enhance
the operating efficiency of the planned process plant and the process itself. As a result of such
changes, capitalized expenditures incurred of $201 million were written off as of the end of the
second quarter of 2004. We announced the key final results of Phase 2 of the review in October 2004. These
final results included an updated 1




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capital cost estimate of $1.878 billion for the mine, process plant and related
infrastructure, within a minus five per cent to plus 15 per cent reliability range. This estimate
included about $40 million for assumed escalation in costs during the construction phase of the
project, an amount that was not in previous capital costs estimates, and also reflected favourable
currency hedging gains realized by Inco of about $31 million which were also not included in
previous estimates. The principal reasons for the increase from the $1.85 billion estimate which
had been announced in May 2004 were higher costs for a range of construction materials and labour
required for construction and the incorporation of a new tailings storage area as part of the
project. Having completed and achieved the key objectives of Phase 2 of the review, in October
2004 we also announced the decision to proceed with the project. It is currently expected that project execution will be based upon a phased approach, with the first phase focusing on
engineering, contract development and permitting. Engineering work has progressed to date and
fieldwork is currently expected to commence in the second quarter of 2005. It is currently
expected that the project will commence production in the latter part of 2007. For further
information on the Goro project and related matters, reference is made to Goro Nickel S.A. below. Inco holds a 100 per cent equity interest in the Voiseys Bay nickel-copper-cobalt deposits in
Labrador in the Province of Newfoundland and Labrador through its wholly-owned subsidiary, Voiseys
Bay Nickel Company Limited (VBNC). In 2002 we reached agreements with the other key stakeholders
in the project, the Province of Newfoundland and Labrador, the Labrador Inuit Association (LIA)
and Innu Nation, to enable the commercial development of the Voiseys Bay deposits to proceed. In
2004, we continued to make progress on the Voiseys Bay project towards the start-up of commercial
production and, as a result, the project completion date for the initial phase, including the open
pit mine, concentrator and demonstration plant to test hydrometallurgical processes, was advanced
by six months from the original schedule established, with the first shipment of intermediate
nickel concentrate currently planned for November 2005 and initial finished nickel production from
Voiseys Bay concentrate in early 2006. Work also advanced in 2004 to prepare our Ontario and
Manitoba operations to receive and process the intermediate nickel concentrate from Voiseys Bay.
During 2004, testing of hydrometallurgical processes to treat the Voiseys Bay ores as part of the
research and development program covering those processes continued and design work on the
demonstration plant to be constructed to advance the testing of those processes was completed.
Site construction for the demonstration plant in Argentia in the Province of Newfoundland and
Labrador began in 2004 and this facility is currently expected to be ready to receive the first nickel concentrate in late 2005.
For further information on the Voiseys Bay project and related matters, reference is made to
Voiseys Bay Nickel Company Limited below. Incos properties are described under Description of Business and Ore Reserves and Mining
Rights below. The information in this Report is as of December 31, 2004 except where an earlier or later
date is expressly indicated. Nothing included herein should be considered as implying that any
information is correct as of any date other than December 31, 2004, except as otherwise expressly
stated. In this Report, certain data and estimates which had been previously limited to the Western
World or the Western World plus China because of limited available data from certain countries or
regions have been reported on a global or worldwide basis. 
 Availability of Documents Inco files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K with the Securities and Exchange Commission (the SEC). You may read and copy
any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. You may obtain information on the hours of operation of the SECs Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Such reports and all amendments to such
reports regarding Inco are available free of charge on our website, www.inco.com, as soon as
reasonably practicable after such reports are electronically filed with the SEC. Information
contained in or otherwise accessed through our website does not form part of this Report. All such
references to our website are inactive textual references only. 
 Cautionary Statement Regarding Forward-Looking Statements Certain statements contained in this Report are forward-looking statements (as defined in
the U.S. Securities Exchange Act of 1934, as amended). Examples of such statements include, but
are not limited to, statements concerning: (1) the price volatility for nickel and other primary
metal products produced by the Company; (2) the demand for and supply of nickel, copper and other
metals, both globally and for certain markets and uses, as well as the availability of, and prices
for, intermediate products containing nickel purchased by the Company and/or to be produced by the
Company and nickel-containing stainless steel scrap and other substitutes for primary nickel and
nickel inventories; (3) the premiums realized by the Company over London Metal Exchange (LME)
cash prices and the sensitivity of the Companys results of operations to changes in metals prices,
prices of commodities and other supplies used 2




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in its operations and interest and exchange rates; (4) the Companys strategies and plans; (5)
the Companys nickel unit cash cost of sales before and after by-product credits, interest and
other expenses; (6) the Companys energy and other costs, and pension contributions and expenses
and assumptions relating thereto; (7) the Companys position as a low-cost producer of nickel; (8)
the Companys debt-equity ratio and tangible net worth; (9) the political unrest or instability in
countries such as Indonesia and the impact thereof on the Companys Indonesian subsidiary, PT Inco,
and political developments in other countries in which the Company operates and elsewhere; (10)
construction, commissioning, initial shipment and other schedules, capital costs and other aspects
of the Goro and Voiseys Bay projects and PT Incos program
to increase its production, changes in the ownership of the Goro project, capital
expenditures, and hydroelectric power generation at PT Inco and the effect thereon of lower water
levels; (11) the necessary financing plans and arrangements for, and partner or similar investment
and other agreements or arrangements associated with, the Goro project, and the timing of the start
of production and the costs of construction with respect to, the issuance of the necessary permits
and other authorizations required for, and engineering and construction timetables for, the Goro
and Voiseys Bay projects; (12) the Companys estimates of the quantity and quality of its ore
reserves; (13) planned capital expenditures and tax payments; (14) the Companys costs of
production and production levels, including the costs of and potential impact on operations and
production of complying with existing and proposed environmental laws and regulations and net
reductions in environmental emissions; (15) the impact of changes in Canadian dollar-U.S. dollar
and other exchange rates on the Companys costs and the results of its operations; (16) the
Companys sales of specialty nickel products; (17) the Companys cost reduction and other financial
and operating objectives and planned maintenance and other shutdowns; (18) the commercial viability
of new production processes and process changes and processing recoveries for its development
projects; (19) the Companys productivity, exploration and research and development initiatives as
well as environmental, health and safety initiatives; (20) the negotiation of collective agreements
with its unionized employees; (21) the Companys sales organization and personnel requirements;
(22) business and economic conditions; (23) the extension of current mining and other leases,
export licences and concessionary rights; and (24) the enforceability of certain liabilities.
Inherent in forward-looking statements are risks and uncertainties well beyond the Companys
ability to predict or control. Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements contained in this
Report. Such statements are based on a number of assumptions which may prove to be incorrect,
including, but not limited to, assumptions about: (a) business and economic conditions, including
exchange rates and energy and other anticipated and unanticipated costs and pension contributions
and expenses; (b) the supply and demand for, deliveries of, and the level and volatility of prices
of, nickel, copper, cobalt and the Companys other primary metals products, purchased intermediates
and nickel-containing stainless steel scrap and other substitutes and competing products for the
primary nickel and other metal products the Company produces; (c) the timing of the receipt of
remaining regulatory and governmental approvals for the Goro and Voiseys Bay projects and other
operations; (d) the availability of financing, including through partner or other participation
arrangements in the case of the Goro project, for the Companys development projects on reasonable
terms; (e) the Companys costs of production and production and productivity levels, as well as
those of the Companys competitors; (f) engineering and construction timetables and capital and
operating costs for the Goro and Voiseys Bay projects; (g) market competition; (h) mining,
processing, exploration and research and development activities; (i) the accuracy of ore reserve
estimates; (j) premiums realized over LME cash and other benchmark prices; (k) tax
benefits/charges; (l) the resolution of environmental and other proceedings and the impact on the
Company of various environmental regulations and initiatives; (m) political instability in
Indonesia and other countries or locations in which the Company operates or otherwise; and (n) the
Companys ongoing relations with its employees at its operations throughout the world. The
forward-looking statements included in this Report represent the Companys views as of the date of
this Report. While the Company anticipates that subsequent events and developments may cause the
Companys views to change, the Company specifically disclaims any obligation to update these
forward-looking statements. These forward-looking statements should not be relied upon as
representing the Companys views as of any date subsequent to the date of this Report. 3




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Description of Business 
 Sales The following table shows Incos net sales to customers for the three years ended
December 31, 2004: 2004
    
    
    2003
    
    
    2002(in millions)Primary nickel
    
    $
    3,503
    
    
    $
    2,109
    
    
    $
    1,654Copper
    
    
    364

    
    
    
    171
    
    
    
    184Precious metals (1)
    
    
    246
    
    
    
    114
    
    
    
    238Cobalt
    
    
    71
    
    
    
    17
    
    
    
    24Other (2)
    
    
    94
    
    
    
    63
    
    
    
    61Net sales to customers
    
    $
    4,278
    
    
    $
    2,474
    
    
    $
    2,161
   (1)
    
    Excludes toll-refined materials.(2)
    
    Representing principally sales of sulphuric acid, liquid sulphur dioxide, miscellaneous
primary metals products, reprocessed waste materials and certain price adjustments. 
 Deliveries The following table shows deliveries of Incos principal primary metals and related
products for the three years ended December 31, 2004: 2004
    
    
    2003
    
    
    2002Nickel, including intermediates(1) (tonnes)(2)
    
    
    251,882
    
    
    
    213,890
    
    
    
    231,590Copper(3) (tonnes)
    
    
    124,884
    
    
    
    93,335
    
    
    
    113,116Cobalt (tonnes)
    
    
    1,542
    
    
    
    903
    
    
    
    1,582Platinum(4) (troy ounces, in thousands)
    
    
    183
    
    
    
    83
    
    
    
    189Palladium(4) (troy ounces, in thousands)
    
    
    221
    
    
    
    101
    
    
    
    225Rhodium(4) (troy ounces, in thousands)
    
    
    9
    
    
    
    17
    
    
    
    13Ruthenium(4) (troy ounces, in thousands)
    
    
    3
    
    
    
    2
    
    
    
    1Iridium(4) (troy ounces, in thousands)
    
    
    4
    
    
    
    6
    
    
    
    3Gold(4) (troy ounces, in thousands)
    
    
    80
    
    
    
    50
    
    
    
    71Silver(4) (troy ounces, in thousands)
    
    
    1,990
    
    
    
    1,435
    
    
    
    1,570Sulphuric acid and liquid sulphur dioxide (tonnes)
    
    
    747,000
    
    
    
    548,000
    
    
    
    732,000
   (1)
    
    Includes 16,697 tonnes in 2004, 29,780 tonnes in 2003 and 19,343 tonnes in 2002 purchased
by Inco.(2)
    
    A tonne is a metric unit equal to approximately 2,204.6 pounds.(3)
    
    Includes 1,133 tonnes in 2003 and 3,097 tonnes in 2002 purchased by Inco.(4)
    
    Excludes toll-refined materials. 
 Prices 
 Nickel Incos nickel price realizations tend to lag LME cash nickel price movements due
primarily to the terms of its contractual sales arrangements with certain of its customers. The
LME, a physical market where various metals, including nickel, can be bought or sold for prompt or
future delivery, represents the principal terminal market for primary nickel in the world. We
realize a premium over prevailing LME cash prices for our nickel powders and other value-added
products, as discussed under Inco Special Products below. Our average realized price for our primary nickel products, including intermediates and
purchased products, was $13,906 per tonne ($6.31 per pound) in 2004, representing an increase of 41
per cent from the average price of $9,860 per tonne ($4.47 per pound) in 2003. The 2003 average
realized price was 38 per cent higher than the average price of $7,143 per tonne ($3.24 per pound)
realized in 2002. 4




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The price realizations for our nickel and other primary metals products generally reflect LME
or other metal market prices and, over the longer term, depend principally upon the balance between
demand for our products in the marketplace relative to the supply available from us and our
competitors, including for this purpose similar primary metals materials in various producer,
merchant and consumer inventories, inventories of secondary or scrap materials containing nickel
and other metals in usable or recyclable form, and supplies of other materials which may compete as
substitutes. Of particular importance is the availability of nickel-containing stainless steel
scrap, which competes directly with primary nickel as a source of nickel for use in the production
of stainless steel and certain other industrial applications. The stainless steel scrap ratio, or
the proportion or ratio of nickel-containing stainless steel scrap relative to
the total nickel (including primary nickel) consumed by stainless steel producers, was 47 per cent in 2004, compared with 44
per cent in 2003 and 45 per cent in 2002. The applications for nickel and variations in demand for
and supply of nickel are discussed under Nickel below. For information on Incos hedging transactions relating to nickel, see Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations  Derivative Instrument Positions in
Managements Discussion and Analysis of Financial Condition and Results of Operations under Item
7 of this Report and Notes 1, 21 and 24(h) to the financial statements under Item 8 of this Report. The average prices, per tonne and per pound, realized by Inco for its primary nickel products,
including intermediates and purchased products, for the five years ended December 31, 2004,
including by quarter for 2004, are shown in the following table: Year
    
    Nickel($ per tonne)
    
    
    ($ per pound)2000
    
    
    9,007
    
    
    
    4.092001
    
    
    6,468
    
    
    
    2.932002
    
    
    7,143
    
    
    
    3.242003
    
    
    9,860
    
    
    
    4.472004First Quarter
    
    
    14,660
    
    
    
    6.65Second Quarter
    
    
    12,587
    
    
    
    5.71Third Quarter
    
    
    14,258
    
    
    
    6.47Fourth Quarter
    
    
    14,138
    
    
    
    6.41Year
    
    
    13,906
    
    
    
    6.31
 
 Copper Incos average realized price for copper was $2,916 per tonne ($1.32 per pound) in 2004,
representing an increase of 59 per cent from the average price of $1,832 per tonne ($0.83 per
pound) in 2003. The 2003 average realized price was 12 per cent higher than the average price of
$1,629 per tonne ($0.74 per pound) realized in 2002. The average prices, per tonne and per pound, realized by us for copper, including purchased
products, for the five years ended December 31, 2004, including by quarter for 2004, are shown in
the following table: Year
    
    Copper($ per tonne)
    
    
    ($ per pound)2000
    
    
    1,908
    
    
    
    0.872001
    
    
    1,668
    
    
    
    0.762002
    

    
    1,629
    
    
    
    0.742003
    
    
    1,832
    
    
    
    0.832004First Quarter
    
    
    2,793
    
    
    
    1.27Second Quarter
    
    
    2,788
    
    
    
    1.26Third Quarter
    
    
    2,821
    
    
    
    1.28Fourth Quarter
    
    
    3,283
    
    
    
    1.49Year
    
    
    2,916
    
    
    
    1.32
 5




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##### Table of Contents



Other Metals The average prices, per tonne or per troy ounce, realized by Inco for cobalt, the
principal platinum-group metals (platinum, palladium and rhodium), gold and silver, all of which
are produced primarily from our Ontario ores, for the five years ended December 31, 2004 are shown
in the following table: Year
    
    Cobalt
    
    
    Platinum
    
    
    Palladium
    
    
    Rhodium
    
    
    Gold
    
    
    Silver($ per tonne)
    
    
    
    
    
    
    ($ per troy ounce)2000
    
    
    29,475
    
    
    
    541.55
    
    
    
    670.04
    
    
    
    1,930.63
    
    
    
    278.91
    
    
    
    4.992001
    
    
    23,216
    
    
    
    541.27
    
    
    
    711.32
    
    
    
    1,475.85
    
    
    
    270.50
    
    
    
    4.402002
    
    
    15,124
    
    
    
    545.92
    
    
    
    419.70
    
    
    
    804.59
    
    
    
    309.17
    
    
    
    4.582003
    
    
    18,846
    
    
    
    588.96
    
    
    
    297.36
    
    
    
    530.66
    
    
    
    367.72
    
    
    
    4.862004
    
    
    46,442
    
    
    
    762.73
    
    
    
    225.56
    
    
    
    1,166.85
    
    
    
    398.68
    
    
    
    6.73
 For information on our hedging transactions relating to these metals, see Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations  Derivative Instrument Positions under Item 7
of this Report and Notes 1, 21 and 24(h) to the financial statements under Item 8 of this Report. 
 Results of Operations All financial statement information in this Report is based on our financial statements
prepared in accordance with generally accepted accounting principles (GAAP) in Canada. A
reconciliation of our Canadian GAAP financial statements to United States GAAP is presented in Note
24 to the financial statements under Item 8 of this Report. 
 Customers As in recent years, sales of Incos primary metals products in 2004 were concentrated in
the United States, Europe, Japan, other countries in Asia, and Canada, with sales of nickel to
customers in Asia representing about 62 per cent of its total nickel sales revenues for 2004. For
further information, see Incos Position in the Nickel Industry below. No single non-affiliated customer of Inco accounted for more than 10 per cent of total sales
in 2004, 2003 or 2002. See Nickel, Copper and Other Primary Metals and Related Products below for additional
information on the Companys customers. 
 Competitors A discussion of the competitive conditions in the nickel industry appears under Nickel
below. Competitive conditions with respect to our other primary metals and related products are
discussed under Copper and Other Primary Metals and Related Products below. 
 Inventories Incos general practice is to sell its principal primary metals products at the time of
production and not to hold inventories except as necessary to meet its current sales requirements.
Our finished nickel inventories at the end of each of the five years ended December 31, 2004 are
shown in the following table: Incos FinishedYear-end
    
    Nickel(in tonnes)2000
    
    
    26,5822001
    
    
    26,5172002
    
    
    23,1262003
    
    
    25,6042004
    
    
    27,334
 6




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##### Table of Contents



Historically, we have believed that the minimum finished nickel inventories we generally need
to run our business and meet our customers requirements should be about 26,000 tonnes, depending
upon the required product mix and other factors. Finished nickel inventories were higher at
year-end 2004 than at year-end 2003 due to the timing of certain shipments which were to be made in
late 2004. We expect to continue to evaluate the factors to be
considered in determining what our
minimum inventory level should be. 
 Nickel Unit Cash Cost of Sales Since this measure captures our key costs of production and the impact of prices for our
by-products, nickel unit cash cost of sales represents a key performance measurement that
management uses to manage our costs and operations. Nickel unit cash cost of sales before by-product credits, representing a calculation equal to
the total of all cash costs incurred to produce a unit of nickel before the deduction of
contributions from by-products sold divided by Inco-source nickel deliveries, increased to $5,732
per tonne ($2.60 per pound) in 2004 from $4,453 per tonne ($2.02 per pound) in 2003. The 2004
increase in nickel unit cash cost of sales before by-product credits was principally due to the
higher cost for, and volumes of, purchased nickel intermediates, the higher average Canadian dollar
exchange rate relative to the U.S. dollar exchange rate compared with 2003, higher costs for heavy
oil at PT Inco, higher spending on supplies and services primarily as a result of increased
production rates and higher earnings-based compensation payments, partially offset by the absence
of ramp-up costs which we incurred in the third quarter of 2003 after the end of the strike at our
Ontario operations, and the cost reductions and related savings as discussed below. Nickel unit
cash cost of sales before by-product credits increased in 2003 from $3,483 per tonne ($1.58 per
pound) in 2002. Nickel unit cash cost of sales after by-product credits increased to $5,115 per tonne ($2.32
per pound) in 2004 from $4,740 per tonne ($2.15 per pound) in 2003. The increase in nickel unit
cash cost of sales after by-product credits for 2004 compared with 2003 was due to higher nickel
unit cash cost of sales before by-product credits, partially offset by higher by-product credits as
a result of higher realized selling prices for and higher deliveries of our principal by-products.
Nickel unit cash cost of sales after by-product credits increased in 2003 from $3,197 per tonne
($1.45 per pound) in 2002. The increase in nickel unit cash cost of sales both before and after
by-product credits in 2003 was due to the unfavourable effect of the strengthening of the Canadian
dollar relative to the U.S. dollar on our costs incurred in Canadian dollars, higher energy costs
at PT Inco and our Ontario operations, higher employment and pension costs, higher costs for
purchasing and processing larger volumes of purchased nickel intermediates, the ramp-up problems
experienced at our Ontario operations after the three-month strike discussed above, and, in the
case of nickel unit cash cost of sales after by-product credits, lower contributions from
by-products primarily resulting from lower deliveries of platinum group metals. We use purchased nickel intermediates to increase processing capacity utilization at our
Canadian operations. While the cost of purchased nickel intermediates is higher than that for
processing our own mine production and such costs increase as the prevailing prices, LME cash
nickel or other benchmark prices, on which basis this material is purchased by us increases, the
price realizations are also higher, resulting in margins on these purchases remaining relatively
unchanged. A reconciliation of our nickel unit cash cost of sales before and after by-product credits to
cost of sales under Canadian GAAP is shown in the table entitled Reconciliation of Nickel Unit
Cash Cost of Sales Before and After By-Product Credits to Canadian GAAP Cost of Sales under
Non-GAAP Financial Measure in Managements Discussion and Analysis of Financial Condition and
Results of Operations under Item 7 of this Report. In 2004, Inco realized cost reductions and related savings of $59 million. We are currently
targeting a further $60 million in cost reductions in 2005. 7




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##### Table of Contents



Incos nickel unit cash cost of sales, both before and after by-product credits, for the five
years ended December 31, 2004 are shown in the following table: Nickel Unit Cash
    
    
    Nickel Unit CashCost of Sales
    
    
    Cost of SalesBefore By-
    
    
    After By-Year
    
    Product Credits
    
    
    Product Credits($ per pound)2000
    
    
    1.48
    
    
    
    1.232001
    
    
    1.56
    
    
    
    1.352002
    
    
    1.58
    
    
    
    1.452003
    
    
    2.02
    
    
    
    2.152004
    
    
    2.60
    
    
    
    2.32
 Based upon the average exchange rate for the year, the Canadian dollar, the currency in which
a substantial portion of our operating costs are incurred, increased by 7.5 per cent relative to
the U.S. dollar in 2004. In 2003, the Canadian dollar increased by 12 per cent relative to the
U.S. dollar. At December 31, 2004, the value of the Canadian dollar relative to the U.S. dollar
was $0.831, compared with $0.774 at December 31, 2003 and $0.633 at December 31, 2002, and was
$0.831 at March 11, 2005. At December 31, 2004, we had outstanding forward currency contracts to
purchase Cdn.$230 million at an average exchange rate of $0.749 during 2005. The purpose of these
contracts is to eliminate the risk of exchange rate movements on a portion of the future
construction costs of the planned facilities for the initial phase of the Voiseys Bay project. We
also had outstanding at December 31, 2004 forward currency contracts to purchase Cdn.$79 million at
an average exchange rate of $0.840 during 2005 and 2006. The purpose of these contracts is to
eliminate the risk of exchange rate movements on a portion of our future construction costs of
certain capital assets at our Ontario operations. In addition, at December 31, 2004 we had
outstanding forward currency contracts to purchase Cdn.$170 million at an average exchange rate of
$0.808 during 2005. The purpose of these contracts is to offset the foreign exchange risk
associated with a portion of our Canadian dollar denominated tax liabilities which are due in the
first quarter of 2005 in respect of the 2004 calendar year. For further information on these
contracts and a discussion of the sensitivity of foreign currency exchange rates on the Companys
earnings, see Voiseys Bay Nickel Company Limited  Project Phases below and Managements
Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this
Report. Operating costs continued to represent a major challenge for us in 2004 due to a stronger
Canadian dollar, higher energy costs, increased pension expense and higher costs for purchased
intermediates. It is currently expected that at least some of the principal factors which have
caused increases in nickel unit cash cost of sales before and after by-product credits for 2004
will continue to adversely affect such nickel unit cash costs of sales into 2005. For information regarding Incos profit sharing and incentive arrangements and the collective
agreements with our unionized employees, see Employees below. 
 Business Segment Information Our business operations consist of two segments, our (i) finished products segment,
representing our mining and processing operations in Ontario and Manitoba, our refining operations
in the United Kingdom and interests in refining operations in Japan and other Asian countries
referred to above, and (ii) intermediates segment, which represents PT Incos mining and processing
operations in Indonesia, where nickel-in-matte, an intermediate product, is produced and sold
primarily into the Japanese market. In addition, as part of our strategy to be the worlds lowest
cost and most profitable nickel producer, we are currently developing two major new or so called
greenfield projects, our wholly owned Voiseys Bay nickel-copper-cobalt project in the Province
of Newfoundland and Labrador, Canada and our approximately 90 per cent owned Goro nickel-cobalt
project in New Caledonia. For further information on our business segments by operating segment,
including each segments net sales to customers, earnings and total assets, and geographic
location, see Note 20 to the financial statements under Item 8 of this Report. 8




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##### Table of Contents



Nickel 
 Applications for Nickel1 Nickel is a hard, malleable metal with a wide range of uses. Its principal
characteristics include imparting strength and corrosion resistance in alloys. The following five
general categories constitute the principal applications of nickel: (i) nickel-bearing or
austenitic stainless steels, (ii) low-alloy steels, (iii) non-ferrous alloys, (iv) foundry industry
castings and (v) non-alloying uses. Incos nickel products represent what is known in the industry
as primary nickel, a designation given to nickel produced principally from nickel ores. It is
estimated that approximately 81 per cent of global primary nickel consumption relates to its end
use in austenitic stainless steel production and as an alloy with other metals. The other type of
nickel used in industrial applications is known as secondary nickel, which is also referred to as
recycled or scrap nickel. Secondary nickel units are recovered largely from austenitic stainless
steel manufacturing and fabricating operations and nickel-containing scrap from obsolete plant and
equipment. In the recent past, secondary nickel has represented between 44 and 48 per cent of the
total nickel used for austenitic stainless steels, with primary nickel accounting for between 52
and 56 per cent of such nickel use. These percentages can vary based upon relative prices, the
availability of scrap and other factors. The nickel industry generally divides its primary nickel products into three categories: (i)
charge nickel products (products of various nickel purities produced in special forms for the
stainless and low-alloy steel industries), (ii) melting nickel products (relatively pure metallic
products for the non-ferrous metals and foundry industries) and (iii) plating nickel products
(relatively pure metallic products in special shapes or cut to special sizes for the plating
industry). The dominant use of primary nickel in the world has continued to be in the production of
nickel-bearing or austenitic stainless steels. Stainless steels, defined as iron-based alloys
containing 10.5 per cent or more chromium, are typically identified by their metallurgical
structure  austenitic, ferritic, martensitic, precipitation-hardening and duplex. Approximately
75 to 77 per cent of global stainless steel production in recent years has consisted of austenitic,
or nickel-bearing, grades. On average, austenitic stainless steels contain approximately eight to
10 per cent nickel. Nickel-bearing stainless steels are used throughout the industrialized world
in a wide variety of applications ranging from consumer products to industrial process equipment,
as well as for power generation and transportation equipment, kitchen appliances and hundreds of
other applications where strength and corrosion resistance are required. Nickel use in
nickel-bearing or austenitic stainless steels currently accounts for about 63 per cent of annual
global primary nickel consumption. A second, closely related, use of primary nickel is in low-alloy steels for construction and
in structural, tool, high-strength and electrical steels. These steels are produced in greater
volume than stainless steels but with a much lower nickel content, averaging less than one per cent
nickel by weight. They account for about five per cent of annual global primary nickel demand. The third category of nickel use is in non-ferrous alloys which, unlike the two categories of
steel alloys noted above, contain little or no iron. These alloys, which are used in industrial
process plants, marine engineering, coinage, electronics, and gas turbine engine components, as
well as in other diverse products, account for approximately nine per cent of annual global primary
nickel demand. A fourth category is comprised of foundry industry castings, which consist of either iron
alloys, steel alloys or non-ferrous alloys. These uses account for about four per cent of annual
global primary nickel demand and represent the balance of the approximately 81 per cent of primary
nickel used to make stainless steels and nickel-containing alloys. The fifth category consists of various non-alloying uses of primary nickel. These uses
account for the remaining 19 per cent of annual global primary nickel demand, and include
electroplating (representing about 10 per cent of primary nickel demand) and numerous applications
of nickel powders, including Incos specialty nickel powder products described under Inco Special
Products below. Many consumer durable goods, such as metal furniture, are nickel-chrome
electroplated. Nickel powder applications are a relatively small but important nickel-consuming
sector. Given the properties of nickel powders, applications include dissolving nickel into salts
for plating and catalysts for the petrochemical industry, and use in nickel-cadmium and
nickel-hydride rechargeable batteries, welding electrodes, metal sprays and specialized parts made
by powder metallurgy. As indicated above, nickel used in stainless and low-alloy steel sectors accounts for
approximately 68 per cent of annual global   1

         Unless otherwise indicated, data in this
Report on applications for nickel are on a global basis. Reports
prior to 2003 from
the Company included data on a Western-World-plus-China basis. Western
World is defined as the world excluding the former East Bloc countries
(Russia and other members of the former Commonwealth of Independent States,
China, Cuba, Bulgaria, the Czech Republic, Slovakia, Hungary, Poland and
Romania). 9




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##### Table of Contents



primary nickel demand. In choosing primary nickel, these two sectors can generally use either
charge nickel products or melting nickel products to satisfy their nickel requirements; however,
they may also use secondary nickel units such as nickel-containing stainless steel scrap or other
recycled nickel-containing material, with the selection being based largely on relative prices and
availability of these materials. See Prices  Nickel above for a discussion of the percentages
of nickel consumed as stainless steel scrap by stainless steel producers. In early 2004, the Nickel Development Institute (NiDI), a non-profit association formed in
1984 to promote applications for nickel, and the Nickel Producers Environmental Research
Association (NiPERA), an organization that Inco and other nickel producers formed in 1980 to
focus on and fund scientific studies relating to environmental, health and other issues related to
various forms of nickel, merged to form the Nickel Institute (NI). Inco had been a member of NiDI since
it was founded. The NI, the membership of which represents more than 70 per cent of
current world nickel production, generates and communicates information required to support the
safe and sustainable production, use and re-use of nickel. It also provides a single membership
and management structure for the activities previously undertaken separately by NiDI and NiPERA,
such as research and development projects, including projects aimed at promoting the use of
nickel-containing stainless steels, broadening markets for nickel-containing alloys resistant to
extreme temperatures, high pressure and corrosion, and seeking to ensure that sound science is used
as the basis for regulatory developments relating to the production and use of nickel and
nickel-containing products and the recycling or disposal of nickel-containing waste materials. The
NI continues the nickel use-related technical work of NiDI, but is focused more on
nickel issues related to stewardship and sustainable development, including the generation and use
of knowledge about the full life cycle impacts of nickel. 
 Historical Review of the Nickel Industry; Recent Industry Conditions2 The nickel market has been cyclical in nature over the past half-century given the
positive correlation of nickel demand to industrial production. Primary nickel demand in the Western World grew significantly during the 1946-1974 period in
response to postwar reconstruction, increased per capita incomes and the rapid growth of the
stainless steel industry. Annual demand increased from approximately 136,100 tonnes in 1950 to a
then record level of approximately 620,000 tonnes in 1974. The compound rate of annual growth in
nickel demand over the 1946-1974 period was about six per cent. With the oil crisis in 1973, the substantial rise in energy costs resulted in a reduction in
industrial production and a consequent reduction in primary nickel demand. These negative trends
were repeated in the early 1980s following a second round of significant oil price increases in
1979-1980 but were reversed in the second half of the 1980s, when a period of strong industrial
growth resulted in an increase in the demand for nickel. Record growth in stainless steel production, accompanied by a shortage of nickel production,
placed significant upward pressure on LME cash nickel prices in 1988 and 1989, with these prices
averaging $13,823 per tonne ($6.27 per pound) and $13,338 per tonne ($6.05 per pound),
respectively, for 1988 and 1989. During the early 1990s, significant increases in primary and secondary nickel deliveries to
the world from the Russian Federation (Russia) and other members of the former Commonwealth of
Independent States (CIS), combined with economic downturns in North America, Western Europe and
Japan, led to a surplus in primary nickel supply, resulting in a weakening of nickel prices. This
situation was exacerbated in 1992 and 1993 by negative economic growth in Western Europe and Japan
and continued exports of nickel from the CIS. From 1990 to 1993, annual average LME cash nickel
prices fell from $8,885 per tonne ($4.03 per pound) to $5,291 per tonne ($2.40 per pound). In 1994 and 1995, a worldwide economic recovery led to strong growth in stainless steel
production and nickel demand, resulting in primary nickel demand exceeding supply and a recovery in
nickel prices, with the LME cash nickel price rising to an average of $8,231 per tonne ($3.73 per
pound) for 1995. In the latter half of the 1990s, strong economic growth led to significant increases in
stainless steel production and nickel demand, except that the Asian economic crisis in 1998 caused
overall nickel demand to decrease slightly that year. The decrease in the demand for nickel during
1998, combined with the markets anticipation of large supplies of low-cost nickel from three new
Australian laterite   2

     Data and estimates included in this
historical review through 2002 are limited to the Western World because of
limited available data for certain countries. See Note 1 above with respect to
our definition of Western World. 10




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##### Table of Contents



projects, Murrin Murrin, Bulong and Cawse, resulted in the LME cash nickel price reaching a
low for the decade of $3,725 per tonne ($1.69 per pound) in December 1998. Nickel prices recovered
during 1999, supported by the resumption of strong economic and nickel demand growth, with the LME
cash nickel price reaching $8,450 per tonne ($3.83 per pound) at the end of 1999. The LME cash nickel price continued to increase into 2000, reaching a peak of $10,660 per
tonne ($4.84 per pound) in March 2000 but over the balance of 2000 declined to $7,190 per tonne
($3.26 per pound) by the end of the year. Solid market conditions contributed to the increase in
the average LME cash nickel price to $8,641 per tonne ($3.92 per pound) in 2000. World production
of stainless steel increased by 8.8 per cent in 2000 to a then record level of 19.5 million tonnes.
However, the use of primary nickel in this segment registered no growth in 2000 due to the
increased supply of nickel-containing stainless steel scrap. Overall world demand for primary
nickel grew by 5.8 per cent in 2000 to 1,109,000 tonnes, reflecting both stock building by
consumers and an estimated 12 per cent growth in consumption for primary nickel in applications
other than stainless steel. In 2000, world primary nickel supply increased by an estimated 78,000
tonnes to 1,105,000 tonnes, due mainly to a rise in primary nickel production in the Western World
of approximately 52,000 tonnes, reflecting mainly production from new nickel capacity and the
continued commissioning of the three new laterite projects in Australia referred to above. Demand
for nickel in 2000 exceeded supply by approximately 4,000 tonnes, but we believe that additional
material was withheld from the market by one leading nickel producer, as reflected in nickel
inventories held in LME warehouses, which fell by over 37,000 tonnes during the year. Market fundamentals weakened during 2001 as the worlds major economies experienced softness.
This weakness in demand was primarily concentrated in the Western World where nickel demand
declined significantly. While there was continued strength in nickel demand in China in 2001, Inco
estimates that there was an overall decline in world nickel demand in 2001 of 2.2 per cent to
approximately 1,085,000 tonnes. World primary nickel production increased by 43,000 tonnes to
1,148,000 tonnes in 2001. The largest sources of this increase in supply were the continued
ramping up of the laterite projects in Australia and the commissioning of new capacity in Venezuela
and Colombia. The world nickel market in 2001 shifted to a surplus position of approximately
63,000 tonnes following the deficit positions in the previous two years. Over 2001, nickel
inventories held by consumers are estimated to have fallen by 13,000 tonnes while LME inventories
increased by only 9,510 tonnes, ending 2001 at 19,188 tonnes. The cash nickel price on the LME
opened 2001 at $6,995 per tonne ($3.17 per pound) but declined to the years low of $4,420 per
tonne ($2.00 per pound) in late October 2001. With the aggressive reduction of interest rates in
the United States and renewed prospects for an economic recovery, prices for nickel improved in the
fourth quarter of 2001 and the LME cash nickel price had increased to $5,680 per tonne ($2.58 per
pound) as of December 31, 2001. The nickel market strengthened in 2002 as world demand grew by approximately eight per cent
during the year to 1,168,000 tonnes despite continued weakness in certain large segments of the
global economy. The growth in nickel demand in 2002 was primarily concentrated in the stainless
steel sector where the growth in nickel demand increased by almost 10 per cent, driven by an
increase in stainless steel production and minimal growth in the use of nickel-containing stainless
steel scrap by stainless steel producers. World stainless steel production increased by 7.9 per
cent to approximately 20.3 million tonnes. This production growth was particularly strong in the
United States, where production increased by 20 per cent, driven by the opening of a new 800,000
tonne-per-year stainless steel production facility in Kentucky, and in Taiwan, where production
increased by 20 per cent as existing facilities operated at near-capacity levels. The growth in
primary nickel supply in 2002 came principally from (i) Colombia and Venezuela, where new or
greenfield projects were completing their ramp-up to their design capacities, (ii) Australia,
where production increased from the continued ramp-up of one project and higher production from
certain existing producers, and (iii) Japan, where production in the form of ferronickel rebounded
to near-capacity levels. The strong growth in nickel demand largely offset the growth in nickel
production in 2002, resulting in a small surplus of approximately 8,000 tonnes for the year.
Inventories of nickel on the LME increased slightly during 2002, remaining at a relatively low
level of 21,972 tonnes at December 31, 2002. The LME cash nickel price opened 2002 at $5,680 per
tonne ($2.58 per pound) and increased during the first half of 2002 as the economies of certain
industrialized countries began to recover, ending the first half of the year at $7,080 per tonne
($3.21 per pound). Prices declined through the third quarter, reaching a low of $6,305 per tonne
($2.86 per pound) in September 2002 as concern over the pace of economic recovery and uncertainty
about a potential war with Iraq adversely affected the nickel markets. The LME cash nickel price
recovered in the fourth quarter, underpinned by improving fundamentals for nickel, ending 2002 at
$7,100 per tonne ($3.22 per pound). The worldnickel market strengthened in 2003 as demand grew by approximately seven
per cent during the year to 1,244,000 tonnes despite continued weakness in certain large segments
of the global economy. During 2003, growth in industrial production continued in China and was
positive in the United States and Japan for the first time in three years, while economic recovery
in Europe continued to struggle to take hold. 11




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The growth in nickel demand in 2003 was concentrated in the stainless steel sector, the
largest end use of primary nickel. Nickel demand growth in this sector increased by almost eight
per cent in 2003, driven by a significant increase in stainless steel production and a decline in
the stainless steel scrap-ratio. The world production of stainless steel increased by nine per
cent to approximately 22 million tonnes in 2003. Stainless steel production expanded in all major
industrial regions and was particularly strong in China and South Korea where new production
facilities were commissioned during the year. Nickel demand growth in non-stainless steel
applications was relatively weak in 2003, as one important end-use market, high nickel alloys for
the aerospace industry, continued to struggle with new aircraft orders remaining at relatively
depressed levels. However, demand for nickel in plating applications was relatively strong, led by
growth in these applications in China, slightly offset by reduced demand for these applications in
Europe and the United States. The growth in world production of primary nickel in 2003 could not keep pace with the demand
growth experienced that year. Production of primary nickel in 2003 was adversely affected by the
labour disruption at our Ontario operations during a three-month period beginning June 1, 2003
which resulted in effectively no production from these operations which would normally produce
about 9,000 tonnes (20 million pounds) of primary nickel per month. We believe that several other
major producers failed to reach their 2003 projected production targets due to unexpected
maintenance or operational problems. The shortfall in production was partially offset by the
release of approximately 60,000 tonnes into the market during 2003, which nickel had been used as
collateral for a loan to one nickel producer. In addition, production of ferronickel in Australia,
New Caledonia, Colombia and the Dominican Republic increased in 2003. As a result, world primary
nickel production increased by 28,000 tonnes to 1,204,000 tonnes in 2003. World primary nickel
supply increased to 1,264,000 tonnes taking into account the release into the market of the 60,000
tonne loan collateral discussed below. The significant growth in nickel demand during 2003, coupled with the limited supply growth,
created an underlying deficit between supply and demand in 2003 of approximately 40,000 tonnes.
With the release in 2003 of 60,000 tonnes of nickel that one producer had pledged as collateral for
a loan, we believe there was a small surplus in the global nickel market of approximately 20,000
tonnes in 2003. Inventories of nickel on the LME increased slightly during 2003 by 2,100 tonnes,
remaining at a relatively low level of 24,072 tonnes at December 31, 2003. For a discussion of the LME cash nickel price during 2003, see Overview  Key Factors
Affecting our Business  2003 Highlights in Managements Discussion and Analysis of Financial
Condition and Results of Operations under Item 7 of this Report. The year 2004 was one characterized by high nickel prices which we believe were due
principally to broad-based growth in underlying global demand for nickel and nickel-containing
materials, in particular in the United States, China and certain European countries. The increase
in demand is attributed to a recovery in non-stainless steel applications for nickel, in particular
for high nickel alloys and battery materials. While primary nickel demand in stainless steel
applications experienced virtually no growth in 2004, global stainless steel production did
increase, but primary nickel demand was negatively affected in this key application by the
relatively large increase in nickel-containing scrap consumption and substitution for nickel in
certain stainless steel applications. We believe that relatively low physical inventories, high
prices and the active trading of hedge or similar funds which purchase and sell or otherwise trade
in metals for profit (Metals Trading Funds) contributed to the volatile price conditions
experienced in 2004, volatility that the nickel markets had not experienced in over 13 years. The
difference between the high and low LME cash nickel prices for 2004 was $7,240 per tonne ($3.28 per
pound). As discussed below, the global nickel market experienced a small deficit for 2004 given
that the level of demand exceeded the level of supply. We believe that the level of demand was,
however, restrained by the amount of supply available, thereby limiting the demand growth rate and
the size of the actual demand-supply deficit. The global nickel market reflected favourable fundamentals for primary nickel producers such
as ourselves in 2004 as demand increased, although we estimate that underlying world demand would
have grown by approximately seven per cent from 2003 levels if adequate nickel had been available
to meet consumption. Underlying demand growth was driven by the strongest global industrial
production growth in 10 years, led by continued economic growth in China, as well as growth in
South Korea, Taiwan and Japan. The industrial economies of the United States and Europe also
exhibited growth above the levels seen in the 2000-2003 period. The growth in primary nickel demand in 2004 was concentrated in the non-stainless steel
sector, as demand from the stainless steel sector was adversely affected by several factors as
discussed below. Nickel demand growth in the non-stainless steel sector increased by seven per
cent in 2004, as demand for nickel for the production of high nickel alloys improved as a result of
the recovery of the aerospace industry as well as due to growth in electronics and battery
applications for nickel. Nickel demand from battery applications improved in 2004, in part due to
the increased production of hybrid electric vehicles that contain nickel in their battery systems.
However, high nickel prices and the effect of substitution of other materials for nickel adversely
affected demand for nickel 12




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in plating applications. World production of stainless steel increased by seven per cent to
approximately 23.5 million tonnes in 2004. This growth was due, in part, to increased capacity
utilization at several large-scale stainless steel manufacturing facilities which had been
commissioned during 2002 and 2003. Stainless steel production expanded in all major industrial
regions and was particularly strong in South Korea where new production facilities were operating
at capacity during the year. However, primary nickel demand growth in the stainless steel sector
was adversely affected, as noted above, by a large increase in secondary nickel stainless steel
scrap consumption, as well as an increase in the production of stainless steels containing
relatively low amounts or grades of nickel (one to four per cent) and grades containing no nickel
compared with higher nickel (eight to 10 per cent) containing stainless steel grades. The growth in the world supply of primary nickel in 2004 could not keep pace with the
underlying demand growth and world supply for 2004 was lower than world nickel supply in 2003,
taking into account the 60,000 tonnes of nickel that had been pledged as loan collateral by one
producer and was subsequently released into the market in 2003, although production of primary nickel
increased by four per cent in 2004. Approximately 50 per cent of global nickel production growth
was the result of our recovery from our strike-affected levels experienced in 2003. In addition,
domestic production of nickel in China and Ukraine increased in 2004 from 2003 levels. As a
result, world primary nickel production increased by 54,000 tonnes to 1,258,000 tonnes in 2004.
However, world primary nickel supply of 1,258,000 tonnes decreased from 1,264,000 tonnes in 2003,
taking into account the release into the market in 2003 of the 60,000 tonnes of nickel referred to
above. The growth in nickel demand during 2004, coupled with the overall decline in supply for 2004
taking into account the 60,000 tonnes representing collateral for a loan which were released into
the market in 2003, as discussed above, created a deficit between supply and demand of
approximately 6,000 tonnes. Inventories of nickel on the LME, decreased during 2004 by 3,174
tonnes to a relatively low level of 20,898 tonnes at December 31, 2004. LME nickel inventories
have declined by 11,610 tonnes in 2005, with such inventories totalling 9,288 tonnes as of March
10, 2005. For a discussion of the LME cash nickel price during 2004, see Overview  Key Factors
Affecting our Business  2004 Highlights in Managements Discussion and Analysis of Financial
Condition and Results of Operations under Item 7 of this Report. An uncertain global economic environment would be expected to have a significant adverse
effect on Incos business and financial results given the historical positive correlation between
industrial production and demand for primary nickel and our other products. There can be no
assurance that the over supply situations which have existed historically in the nickel markets
could not reoccur in the future. Any such conditions would have an adverse effect on the prices
realized by us for our nickel products. Other international economic trends, expectations of
inflation and political events in major nickel producing and consuming countries can also adversely
affect nickel prices and the prices of other metals produced by us. These factors are beyond our
control and have resulted, and are expected to continue to result, in a high degree of price
volatility for nickel and other primary metals produced by us. There can be no assurance that the
price for nickel or other metals produced by us will not decline. A return to the nickel price
realizations for us reasonably near to the LME cash nickel price which prevailed through most of
1998 and into the first half of 1999 and during a portion of the second half of 2001 would have a
material adverse effect on our results of operations, financial condition, cash flows and
liquidity. World primary nickel demand has increased at an average compound annual rate of approximately
six per cent over the last ten years. As noted under Applications for Nickel above, about
two-thirds of world primary nickel demand is associated with the production of austenitic stainless
steels. The following table shows the relationship between our most recent estimates of world
primary nickel demand and stainless steel production for the five years ended December 31, 2004: World
    
    
    WorldPrimary Nickel
    
    
    Stainless SteelYear
    
    Demand(1)
    
    
    Production(in tonnes)
    
    
    (in millions of tonnes)2000
    
    
    1,109,000
    
    
    
    19.52001
    
    
    1,085,000
    
    
    
    18.82002
    
    
    1,168,000
    
    
    
    20.32003
    
    
    1,244,000
    
    
    
    22.02004(2)
    
    
    1,264,000
    
    
    
    23.5
   (1)
    
    Previously disclosed figures were provided on a Western World-plus-China basis.(2)
    
    Preliminary estimates. 13




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The following table shows Incos most recent estimates of world primary nickel demand,
world primary nickel supply, year-end combined Western World producers and LME inventories of
primary nickel, year-end LME nickel inventories and the average annual LME cash nickel prices for
the five years ended December 31, 2004: World
    
    
    World
    
    
    Year-End
    
    
    
    
    
    
    AveragePrimary
    
    
    Primary
    
    
    Combined Western
    
    
    
    
    
    
    Annual LMENickel
    
    
    Nickel
    
    
    World Producers and
    
    
    Year-End LME
    
    
    Cash NickelYear
    
    Demand
    
    
    Supply
    
    
    LME Inventories(2)
    
    
    Inventories
    
    
    Prices(in tonnes)
    
    
    
    
    
    
    ($ per tonne)2000
    
    
    1,109,000
    
    
    
    1,105,000
    
    
    
    90,000
    
    
    
    9,678
    
    
    $
    8,6412001
    
    
    1,085,000
    
    
    
    1,148,000
    
    
    
    106,000
    
    
    
    19,188
    
    
    
    5,9482002
    
    
    1,168,000
    
    
    
    1,176,000
    
    
    
    100,000
    
    
    
    21,972
    
    
    
    6,7722003
    
    
    1,244,000
    
    
    
    1,264,000
    
    
    
    104,000
    
    
    
    24,072
    
    
    
    9,6402004
    
    
    1,264,000
    (1)
    
    
    1,258,000
    (1)
    
    
    105,000
    (1)
    
    
    20,898
    
    
    
    13,852
   (1)
    
    Preliminary estimates.(2)
    
    Excludes Russia, other members of the former CIS, China, Cuba and Eastern Europe. Future nickel consumption and nickel prices could be adversely affected by a number of
factors, including the development of new nickel capacity, such as the new capacity described below
under Participants in the Nickel Industry; new processing technologies which have made, and are
expected to continue to make, the development of relatively low-grade lateritic nickel deposits
economically viable; decreases in the general level of economic and business activity in industrial
economies which, in turn, could lead to reduced production of stainless steel; levels of
nickel-containing stainless steel scrap and other sources of secondary nickel; increased
environmental restrictions affecting the production and use of nickel and nickel-containing
products; recommissioning of any currently remaining shutdown nickel capacity; and, in the longer
term, increased use of substitutes, including plastics and ceramics, for nickel-containing
materials. In addition, the future levels of production and consumption of nickel in Russia are
expected to continue to have significant, but unpredictable, effects on world nickel prices. 
 Participants in the Nickel Industry The seven largest suppliers in the nickel industry, each having its own integrated
facilities, including nickel mining, processing, refining and marketing operations, are MMC Norilsk
Nickel (Norilsk), Inco, Falconbridge Limited (Falconbridge), BHP Billiton plc (BHP Billiton),
Jinchuan Nonferrous Metals Corporation (Jinchuan), WMC Resources Ltd. (WMC) and Eramet and its
subsidiary, Le Nickel-SLN (collectively, Eramet). If BHP Billiton is successful in acquiring
WMC, based upon its announcement in early March 2005, we believe that BHP Billiton would become the
third largest supplier in the nickel industry. Inco estimates that these seven producers accounted
for about 62 per cent of the total world primary nickel production in 2004. In addition to these
seven principal industry participants, there are approximately 25 other producers in numerous other
countries around the world that participate in the nickel industry. Operations of the seven
largest producers are located in several countries. Inco, as noted on page 1 of this Report, has
operations in Canada, the United Kingdom, Indonesia, Japan and China and in other parts of Asia
through two companies, Taiwan Nickel and Korea Nickel, in whose refining capacity Inco has
interests, but less than majority ownership. Norilsk has operations in Russia; WMC has operations
in Australia; Falconbridge has operations in Canada, Norway and the Dominican Republic; Jinchuan
has operations in China; BHP Billiton has operations in Australia and Colombia; and Eramet has
operations in France and New Caledonia. Norilsk has integrated facilities at Norilsk in Siberia and at Pechenga and Severonickel on
the Kola Peninsula of Russia. For 2004, Norilsk reported production of approximately 243,000
tonnes of nickel from all of its facilities, compared with 239,000 tonnes in 2003 and 218,000
tonnes in 2002. Nickel exports from Russia were 251,000 tonnes in 2004, compared with 238,000
tonnes in 2003 and 208,000 tonnes in 2002. 
 Incos Position in the Nickel Industry Inco is a leading producer of nickel. Our nickel deliveries in 2004 represented an
estimated 20 per cent of the total world demand for primary nickel, compared with 17 per cent in
2003 and 20 per cent in 2002. Our total deliveries of nickel in 2004 were 251,882 tonnes, representing an increase of 18 per
cent from total deliveries of 213,890 tonnes in 2003. Deliveries of Inco-source nickel were
235,185 tonnes in 2004, representing an increase of 28 per cent from deliveries of 184,110 tonnes
in 2003. The increase was primarily due to increased production at our Canadian and U.K.
operations as well as at 14




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PT Inco. Production for all metals for 2003 was adversely affected by a three-month strike at
our Ontario operations that began on June 1, 2003. In 2003, our total deliveries of nickel represented a decrease of eight per cent from total
deliveries of 231,590 tonnes in 2002. Deliveries in 2003 of nickel produced at our own facilities
represented a decrease of 13 per cent from deliveries of 212,247 tonnes in 2002. The decrease in
deliveries was primarily due to lower production at our Ontario operations as a result of the
three-month strike and was partially offset by higher nickel deliveries from PT Inco and our
Manitoba operations and an increase in the deliveries of purchased finished nickel. Deliveries of
finished nickel purchased from external sources, which we use to supplement Inco-source production
as required, increased by 54 per cent in 2003 as a result of the three-month strike at our Ontario
operations. We believe that one of the key strengths of our position in the highly-competitive global
nickel industry is the broad geographic distribution of our customers. In 2004, we continued to
supply our customers worldwide from our operations in Canada, the United Kingdom and Asia. In
2004, reflecting our global market presence, 25 per cent of our total primary nickel deliveries
were to customers in the United States and Canada, 23 per cent to customers in Japan, 11 per cent
to customers in Europe, and 41 per cent to customers in other countries, primarily in Asia,
compared with 21 per cent to customers in the United States and Canada, 25 per cent to customers in
Japan, 12 per cent to customers in Europe, and 42 per cent to customers in other countries,
primarily in Asia, in 2003. In 2004, sales to customers in Asia, including Japan, represented 62
per cent of our total nickel deliveries for the year, compared with 66 per cent in 2003. In 2004, we continued to implement marketing strategies aimed at providing consistent
long-term demand for our products. At year-end 2004, we had fixed-volume contracts with customers
for a substantial portion of our expected annual nickel sales. These contracts, combined with the
requirements of our affiliated refineries in Asia and our sales of proprietary nickel products,
have continued to provide stable demand for a significant portion of our annual production. The following table shows, for the five years ended December 31, 2004, our most recent
estimates of total world primary nickel demand, our total nickel deliveries, our deliveries of
purchased nickel, our estimated share of world demand based on our total nickel deliveries, the LME
average cash and three-month nickel prices and our average realized price for our primary nickel
products: LME
    
    
    LME
    
    
    IncoInco
    
    
    Inco
    
    
    Average
    
    
    Average
    
    
    AverageDeliveries of
    
    
    Share of
    
    
    Cash
    
    
    3-Month
    
    
    RealizedWorld Primary
    
    
    Total Inco
    
    
    Purchased
    
    
    World
    
    
    Nickel
    
    
    Nickel
    
    
    NickelYear
    
    Nickel Demand
    
    
    Deliveries(1)
    
    
    Nickel
    
    
    Demand
    
    
    Price
    
    
    Price
    
    
    Price(1)(in tonnes)
    
    
    
    
    
    

    (%)
        
    
    
    
    
    ($ per tonne)2000
    
    
    1,109,000
    
    
    
    259,374
    
    
    
    60,277
    
    
    
    23
    
    
    
    8,641
    
    
    
    8,453
    
    
    
    9,0072001
    
    
    1,085,000
    
    
    
    230,049
    
    
    
    22,978
    
    
    
    21
    
    
    
    5,948
    
    
    
    5,877
    
    
    
    6,4682002
    
    
    1,168,000
    
    
    
    231,590
    
    
    
    19,343
    
    
    
    20
    
    
    
    6,772
    
    
    
    6,755
    
    
    
    7,1432003
    
    
    1,244,000
    
    
    
    213,890
    
    
    
    29,780
    
    
    
    17
    
    
    
    9,640
    
    
    
    9,610
    
    
    
    9,8602004
    
    
    1,264,000
    (2)
    
    
    251,882
    
    
    
    16,697
    
    
    
    20
    (2)
    
    
    13,852
    
    
    
    13,765
    
    
    
    13,906
   (1)
    
    Includes intermediates and purchased nickel.(2)
    
    Preliminary estimates. 
 Inco Special Products Inco is a world leader in the development, production and sale of value-added or
specialty nickel products, including powders, foams, flakes, oxides and nickel-coated graphite.
These products are used for such applications as consumer electronics, rechargeable batteries for
consumer and hybrid vehicle use, fuel cells, powder metallurgy, automotive parts, electromagnetic
interference shielding for computers and cellular telephones, special catalysts and salts, metal
injection moulding, and hard metal binders. Inco Special Products, an unincorporated business unit, has responsibility for all business
activities related to our value-added or specialty nickel products. Our value-added or specialty
nickel products are developed at our research laboratory at Mississauga, Ontario and are
manufactured, using our proprietary gas decomposition technology, at our refineries in Sudbury,
Ontario and Clydach, Wales; and certain value-added or specialty products are also manufactured at
Novamet3 Specialty Products Corporation (Novamet), a wholly-owned subsidiary of Inco
Limited located in Wyckoff, New Jersey. Inco Special Products expects to continue to work closely
with customers to develop advanced nickel products to meet their needs. Accounting for
approximately eight per cent of   3
    
    Inco trademark 15




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##### Table of Contents



Incos nickel sales revenue in 2004, compared with nine per cent in 2003 and 12 per cent in
2002, value-added or specialty nickel products are sold at premium prices. These premiums are
affected by fluctuations in the LME cash nickel price and how we price certain of our value-added
or specialty nickel products. 
 Copper We produce copper at our Ontario operations which we recover, in conjunction with nickel,
principally from the sulphide ores mined in the Sudbury area of Ontario. In 2004, our copper
production was 124,456 tonnes, representing an increase of 37 per cent from 91,134 tonnes in 2003
and reflecting a return to normal production levels following the three-month strike and ramp-up
problems associated with the restart of operations after the strike at our Ontario operations in
2003. Copper production in 2003 was down 18 per cent from 111,787 tonnes in 2002 due to these
factors. Our copper is sold to industrial users under the trademark ORC4. In 2004, all of
our copper production was sold in North America at prices based on quotations on the COMEX Division
of the New York Mercantile Exchange. Copper accounted for $364 million, or nine per cent, of our
net sales to customers in 2004, compared with $171 million, or seven per cent, in 2003 and $184
million, or nine per cent, in 2002. Our sales and deliveries (including purchased copper) for the past three years and our average
realized prices for copper for the past five years are shown in the tables under Sales,
Deliveries and Prices  Copper above, respectively. World refined copper production is currently estimated to have been approximately 15.7 million
tonnes in 2004, compared with 15.2 million tonnes in 2003 and 15.3 million tonnes in 2002. Like nickel prices, copper prices have been in recent years, and are expected to continue to
be, subject to significant price volatility. In 2003, strong economic growth in Asia, in
particular China, combined with a number of production cutbacks and the actions of one leading
copper producer which we understand stockpiled material, led to accelerating declines in reported
stocks throughout 2003. By the end of 2003, reported copper stocks on the COMEX and the LME had
declined by over 40 per cent to 711,100 tonnes. The COMEX first position price averaged $1,787 per
tonne ($0.81 per pound) in 2003, a 13 per cent increase from $1,580 per tonne ($0.72 per pound) in
2002. In 2004, continued economic growth in Asia, combined with the relatively strong economic
recovery in the United States, led to an increase in global copper demand. Global copper
production was, however, negatively impacted in 2004 by an open-pit mine collapse at one leading
copper producer as well as labour disruptions at various other copper production facilities. By
the end of 2004, combined reported copper stocks on the COMEX and the LME had declined from
year-end 2003 levels by over 86 per cent to 97,100 tonnes in total. The COMEX first position price
averaged $2,848 per tonne ($1.29 per pound) in 2004, a 59 per cent increase over the average price
for 2003, and was $3,265 per tonne ($1.48 per pound) on March 11, 2005. 
 Other Primary Metals and Related Products Other primary metals and related products accounted for 10 per cent of our total net
sales to customers in 2004, compared with eight per cent in 2003 and 15 per cent in 2002. These
products include cobalt, platinum-group metals (platinum, palladium, rhodium, ruthenium and
iridium), gold, silver, sulphuric acid, liquid sulphur dioxide and some modest quantities of
selenium and tellurium, as well as certain price adjustments. For 2004, based upon production
principally from our Ontario ores, we accounted for approximately three per cent of the worlds
supply of platinum-group metals. Platinum-group metals are utilized primarily for catalysts,
electronic components and jewellery. In addition to refining our own ores to obtain platinum-group
metals, we process substantial volumes of spent automotive catalytic converters and other material
containing these metals at our Sudbury, Ontario and Acton, England refineries. In 2004, such other
material, which was principally toll-refined, accounted for about 64 per cent of all platinum-group
metals refined by us, compared with 76 per cent in 2003 and 60 per cent in 2002. Deliveries of
toll-refined material, however, are not included in our deliveries of precious metals shown in the
table under Deliveries above since we do not take ownership of these materials. Sales of
platinum-group metals accounted for approximately five per cent of our net sales to customers in
2004, compared with four per cent in 2003 and 11 per cent in 2002. Approximately 85 per cent of Incos cobalt production, which is derived from its Canadian ores
and purchased feedstock material, is sold as metal, with the balance being sold as a cobalt
intermediate product. The intermediate product is used by chemical producers   4
    
    Inco trademark 16




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##### Table of Contents



to make cobalt-based chemicals. Cobalt metal is used in the production of various alloys,
particularly for aerospace applications, as well as the manufacture of cobalt-based chemicals. Copper and nickel producers supply a majority of the worlds cobalt production as a by-product
of their copper and nickel operations, which has resulted in the supply of cobalt being largely
driven by the demand for copper and nickel rather than the demand for cobalt. As a result, there
has been a significant increase in the supply of cobalt in the last decade. Demand for cobalt from
the aerospace and land-based gas turbine sectors, which together currently represent about 23 per
cent of world cobalt consumption, improved in 2004 compared with 2003, but still did not reach the
level of demand that existed prior to September 11, 2001. In 2004, the total demand for cobalt
increased as a result of the growth of applications for cobalt in the battery and catalyst market
sectors. The increase in cobalt demand as a result of these applications, together with certain
supply disruptions, resulted in the market that reportedly moved to a deficit position in the first
half of 2004. In the second half of 2004, we believe that weaker market conditions prevailed as a
result of consumers in Japan and China, having built up inventories,
then scaled back purchases in
the second half of the year and an increased supply of intermediate cobalt products from Africa. The
Metal Bulletin 99.8 average reference price for cobalt, the most commonly used benchmark price for
cobalt pricing, averaged $53,117 per tonne ($24.09 per pound) for the year, compared with $23,951
per tonne ($10.86 per pound) in 2003 and $15,660 per tonne ($7.11 per pound) in 2002. On March 9,
2005, the Metal Bulletin 99.8 average reference price for cobalt was $35,825 per tonne ($16.25 per
pound). As indicated in the table of Incos price realizations under Prices  Other Metals above,
Incos average realized price for its cobalt deliveries was $46,442 per tonne ($21.07 per pound) in
2004, compared with $18,846 per tonne ($8.55 per pound) in 2003 and $15,124 per tonne ($6.86 per
pound) in 2002. Our Goro and Voiseys Bay projects, in addition to the quantities of nickel
projected to be produced by them, are also expected to produce significant quantities of cobalt
given the currently estimated quantities of cobalt in the mineral deposits to be mined as part of
these projects. With significant increases in the global supply of cobalt and changes in demand,
the price of cobalt has fluctuated significantly over the past several years. The financial
analyses undertaken by Inco in 2004 in support of the substantial planned investment to be made
with respect to the Goro project have been based upon a long-term price of cobalt of $19.85 per
kilogram ($9.00 per pound). If realized cobalt prices, as well as realized prices for the other
metals to be produced by these two projects, were to be below the long-term prices assumed by us,
the expected financial returns from, and expected cash and other unit costs of production after
by-product credits for, these projects would be adversely affected. Inco also produces sulphuric acid and liquid sulphur dioxide from the sulphur dioxide gases
captured as part of its sulphur dioxide (SO2) abatement program at the Ontario
operations. We produced a total of 676,000 tonnes of sulphuric acid and liquid sulphur dioxide in
2004, compared with 473,805 tonnes in 2003 and 673,995 tonnes in 2002. Most of our sulphuric acid
production and all of our liquid sulphur dioxide production are sold to Chemtrade Logistics Inc.,
an unaffiliated customer, under long-term contractual arrangements at prices based on prevailing
market prices for these products. These products are included in the table of product deliveries
under Deliveries above. Tables showing the Companys sales, deliveries and average net realized prices of these other
primary metals and related products are shown under Sales, Deliveries and Prices  Other
Metals above. 
 Mining and Production 
 General Based on publicly available information and our own studies and analysis, we believe
that, relative to other nickel producers, we are a low-cost producer of nickel. Since low-cost
operations are essential in the highly competitive global nickel business, one of our key strategic
objectives is to become the worlds lowest-cost and most profitable producer of nickel. A number
of favourable factors, as described below, generally contribute to our current cost structure, with
the contribution of each factor varying from year to year. A number of other nickel producers
experienced some of the same cost pressures we did in 2004, including higher energy costs and the
impact of the strengthening of the Canadian dollar and certain other currencies in which some or
all of their costs of production are incurred relative to the U.S. dollar, the currency in which at
least some of their revenue is received. Our estimated ore reserves include both sulphide and laterite nickel deposits which are the
two main types of nickel deposits found in the world. Sulphide deposits currently account for
about 30 per cent of the worlds nickel resources and are found in bedrock, often deep below the
surface, which generally makes them more costly to mine than laterite deposits. Sulphide deposits
commonly contain copper, precious metals and cobalt in addition to nickel. Laterite deposits,
which currently account for the remaining 70 per cent of the worlds nickel resources, occur as
either wet laterites or dry laterites. Wet laterites are found in tropical areas where heavy
rainfall combined with suitable landforms have resulted in the concentration of nickel through a
process of surface weathering and 17




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##### Table of Contents



leaching action. Currently, wet laterites may be processed by using either smelting or acid
leaching technology, depending on the characteristics of the particular deposit. Dry laterites,
such as those found in Australia, may be processed only by using acid leaching technology due to
their mineralogy and their generally lower nickel content compared with wet laterites. Laterite
deposits are found at or near the surface and are therefore usually amenable to low-cost surface
mining. Cobalt is also usually present in these deposits. We have large sulphide orebodies with satisfactory ore grades and metallurgical properties
principally at our operations at Sudbury, Ontario and certain sulphide orebodies with generally
declining ore grades at our Thompson, Manitoba operations, and large lateritic orebodies with
satisfactory ore grades and metallurgical properties at our operations in Indonesia. In addition
to nickel, we recover significant quantities of copper, precious metals and cobalt from our Ontario
ores. The relative economic advantages of our Canadian sulphide ores are offset, to some degree,
by the higher mining costs for sulphide ores relative to lateritic ores and by higher costs of
doing business in Canada relative to some other nickel-producing countries. Our unit costs of
production also benefit from economies of scale attributable to our large, integrated mining and
processing facilities and from the use of bulk mining methods and automated mining equipment and
other productivity improvements implemented in recent years in all areas of our business. Energy costs are a significant component of production costs in the nickel industry since
nickel production is very energy- intensive, especially with respect to costs of processing
lateritic ores such as those processed at our PT Inco operations. We enjoy relatively low energy
costs because of substantial production from our Canadian sulphide ores, which generally consume
only about one-fifth of the energy required to process lateritic ores. In addition, low-cost
energy is available from our hydroelectric facilities in Ontario and at PT Incos lateritic mining
operations in Indonesia, and from purchased hydroelectric power at our Manitoba operations. In 2004, our hydroelectric facilities in Ontario generated approximately 19 per cent of our
Ontario operations electricity requirements, and PT Incos 165-megawatt hydroelectric generating
facility at Larona together with its 93-megawatt hydroelectric generating facility at Balambano
generated virtually all of PT Incos 2004 electricity requirements. The Balambano facility has
been able to generate power consistently above its design capacity due to improved water management
practices and higher reservoir levels and other related factors than were assumed in developing its
original design capacity. In 2004, energy costs at our Ontario and Manitoba operations were
approximately 12 per cent of total cash production costs, compared with 34 per cent for PT Inco.
The availability of captive hydroelectric power decreased cash energy costs at PT Inco by about 53
per cent in 2004, 51 per cent in 2003 and 47 per cent in 2002 relative to the energy costs that
would have been incurred by PT Inco if its operations were dependent on fuel oil as the sole source
to meet its energy requirements. Our Ontario operations benefit significantly, and our Manitoba operations benefit to a minor
extent, from the copper, precious metals and cobalt produced in association with nickel. In 2004,
our Ontario ores accounted for approximately 92 per cent of our copper production, 88 per cent of
our by-product platinum-group metals (PGMs) production and 48 per cent of our by-product cobalt
production, with two per cent of our copper production, eight per cent of our by-product
platinum-group metals production and 32 per cent of our cobalt by-product production derived from
our Manitoba ores. We also produce nickel, copper, cobalt and precious metals from purchased
materials. Precious metals have relatively high selling values compared with our processing costs
for these metals. Incos accounting and financial reporting practice is to include revenues from
deliveries of copper, precious metals and cobalt in net sales and to include costs of recovering
such metals in cost of sales. Copper is considered to be a joint product with nickel and, as such,
its production costs include an allocation of mining costs plus its identifiable concentrating,
smelting and refining costs; precious metals and cobalt are considered to be by-products and, as
such, their production costs include no allocation of mining, concentrating and smelting costs, but
do include their identifiable upgrading and refining costs. Our nickel production increased by 27 per cent to 236,817 tonnes in 2004, compared with 2003,
our highest annual production ever, exceeding our previous record of 231,332 tonnes (510 million
pounds) in 1974, primarily reflecting higher production at our Canadian and U.K. operations
compared with 2003 when the three-month strike at our Ontario operations that began on June 1, 2003
and a difficult ramp-up of operations in September 2003 following the strike negatively affected
production. In 2003, our nickel production decreased by 11 per cent to 187,173 tonnes, compared
with 209,728 tonnes in 2002, reflecting lower production at our Ontario operations due to the
three-month strike and the ramp-up problems noted above, partially offset by higher production at
our Manitoba operations, the processing of higher volumes of purchased nickel intermediates at both
the Ontario and Manitoba operations and higher ore grades and higher production levels at PT Inco.
Production of finished nickel from Canadian ores and purchased material processed in Canada
totalled 161,730 tonnes in 2004, compared with 120,479 tonnes in 2003 and 146,620 tonnes in 2002.
Additional nickel and copper production statistics for our primary metals operations are shown in
the tables under Concentrating, Smelting and Refining below. For a discussion of PT Incos
operating rates and estimated ore reserves, see PT International Nickel Indonesia Tbk 
Operations below. Incos 2005 nickel production is currently expected to be in the range of 222,000 to 227,000
tonnes, down from the 236,817 tonnes 18




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produced in 2004. We did not have a scheduled maintenance shutdown at our Ontario operations
in 2004, but consistent with our current plan to have such a shutdown at these operations every 18
months, we are planning a one-month maintenance shutdown in the second quarter of 2005. Such a
shutdown would be expected to reduce our annual nickel production by about 7,000 tonnes, our copper
production by about 11,000 tonnes and our PGMs production by about 35,000 troy ounces from levels
at these operations if there were no shutdown. An annual four-week shutdown is also planned at our
Manitoba operations in 2005 and will also include a planned 10-week furnace rebuild. We expect our
purchases of nickel intermediates to increase by over 13 per cent from 2004 levels to approximately
35,380 tonnes in 2005. This external feed source is expected to represent the source of about 16
per cent of planned 2005 finished nickel production, up from 31,300 tonnes or 13 per cent in 2004.
We continue to use purchased nickel intermediates to increase the processing capacity utilization
of our Ontario and Manitoba operations, as discussed under Risks and Uncertainties  Other Risks
and Uncertainties in Managements Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this Report, and to maintain nickel production at our Manitoba
operations at or near its 45,000-tonne annual capacity. While such use is profitable, it does
increase our costs, particularly at higher nickel prices since the cost of purchased intermediates
is based on prevailing LME cash nickel or other benchmark prices. Copper production for 2005 is
currently expected to be approximately 113,400 tonnes, down nine per cent from the 124,456 tonnes
produced in 2004. Total production of PGMs is expected to decrease to 370,000 troy ounces in 2005
from the 2004 level of 422,000 troy ounces. While we have certain potential new mine development projects at our existing operations in
Canada, if sufficient new low-cost sources of nickel such as the Voiseys Bay and Goro projects are
not developed on a timely basis, our overall nickel production, particularly at our Manitoba
operations, could decline beginning as early as 2006,and our unit costs of production could
increase significantly with any material decline in mine production from our Canadian operations if
such operations were not significantly restructured. These developments could materially adversely
impact our results of operations, financial condition, profitability and cash flows. During 2002, as mine production at our Manitoba operations transitioned from Thompson Mine
to the lower grade Birchtree Mine, we experienced lower mine production. We continued to
experience such lower mine production in 2004 and, as this transition continues to move forward, we
currently expect to see a continuing decline in mine production in Manitoba in 2005 and expect to
see further declines in future years. We have recently been relying, and expect that we will
continue to rely at least for 2005, on an increasing basis, upon the availability of purchased
nickel intermediates to maintain Manitobas nickel production at around the 45,000 tonne annual
level. We currently expect that, with the planned availability of Voiseys Bay intermediate nickel
concentrate for processing at our Manitoba operations beginning by late 2005 or early 2006, these
operations are expected to produce finished nickel products at or above the 45,000 tonne annual
level over at least the 2006  2011 period, after which we currently expect to see, absent the
availability of other cost-effective sources of intermediate nickel product for processing, a
decline in annual production at our Manitoba operations beginning as early as 2012. We have relied upon two Australian suppliers of purchased nickel intermediates to maintain
production at or near capacity principally at our Manitoba operations and, to a lesser extent, at
our Ontario operations. Under these arrangements, these producers are currently expected to
provide an aggregate of 85,000 tonnes of nickel in concentrate over the 2005  2009 period for
further processing by our Ontario and Manitoba operations. If these suppliers experienced problems
in producing or shipping to Canada their intermediate products, these events would have an adverse
effect on our ability to produce and sell the nickel products we plan to produce in 2005 and would
adversely affect our results of operations, financial condition, profitability and cash flows.
Extended strikes, such as the one we experienced at our Ontario operations in 2003, other labour
disruptions and unforeseen events could also adversely affect our production plans and costs and
these developments could also adversely affect our results of operations, financial condition and
cash flows. We continue to explore our options to fully utilize our existing Canadian facilities,
including the purchase of intermediates and additional external feedstocks from existing or new
suppliers and additional mine development. In addition, we are seeking to develop new mines
principally at our Ontario operations to help sustain our production capacity at those operations
and reduce costs. Further information on these projects is set out
under Exploration and Mine Development below. 
 Capital Expenditures The primary focus of Incos capital expenditures is to provide its operations with
appropriate production capacity for its nickel and other primary metals products and to develop new
projects, including the Voiseys Bay and Goro projects. Capital expenditures were $876 million in
2004, compared with $591 million in 2003 and $600 million in 2002. Capital expenditures for the Goro project, including capitalized interest, totalled $138
million in 2004, compared with $249 million 19




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##### Table of Contents



in 2003 and $353 million in 2002, and for the Voiseys Bay project, including capitalized
interest, totalled $447 million in 2004, compared with $138 million in 2003 and $73 million in
2002. The balance of capital expenditures in each of the three years was directed primarily to the
development, maintenance and improvement of new and existing mining operations in Canada and
productivity improvements and to meet environmental regulations and similar requirements. We
currently estimate that our existing operations require, on an annual basis, on average
approximately $250 million of capital expenditures to sustain their operations and to meet current
environmental regulations and similar requirements at our currently planned production and/or
utilization levels for these operations. Our total capital expenditures are currently projected to be $1,450 million in 2005, before
any funding that may be provided by new shareholders in Goro Nickel and certain previously
announced government assistance relating to our development projects. This estimate includes
approximately $410 million for the Voiseys Bay project, including capitalized interest and $50
million to be spent at the Ontario and Manitoba operations for facilities to handle Voiseys Bay
concentrate, approximately $560 million, including capitalized interest, for the Goro project, $70
million for the program to increase production at PT Inco, approximately $320 million in sustaining
capital expenditures for existing operations and approximately $90 million for environmental
measures. Total depreciation, depletion and amortization expenses are currently projected to be
$275 million in 2005, including an estimated $29 million in respect of the Voiseys Bay project
given that it is expected to commence operation in the later part of 2005. Depreciation, depletion
and amortization expenses for the Voiseys Bay operations are currently expected to increase from
the $29 million level for 2005 to about $270 million for 2006, reflecting depreciation of the
facilities and equipment, depletion and amortization of the acquisition cost of the Voiseys Bay
deposits for the full year. The total capital expenditures for the Voiseys Bay and Goro projects
will depend on a number of factors, including receipt of all necessary construction and other
permits and the continued availability of certain tax-advantaged financing from the French
government. For a discussion of the Voiseys Bay project, see Voiseys Bay Nickel Company Limited
 Project Phases below and for the Goro project, see Goro Nickel S.A. below. 
 Mining At December 31, 2004, Inco had the following mines in operation in Canada: Ontario
    
    
    ManitobaCopper Cliff North
    
    BirchtreeCopper Cliff South
    
    ThompsonCreighton (1)GarsonGertrudeMcCreedy/ColemanStobie
   (1)
    
    Excludes Creighton 3 Mine which is located near the main Creighton Mine and accessible by a
separate shaft and ramp. All of the mines listed above are underground mines except for Gertrude Mine which is an
open pit mine. In addition to these operating mines, our Ontario operations include several
non-operating mines or mines on standby which contain estimated ore reserves as indicated in the
tables Total Estimated Ore Reserves as of December 31, 2004 and Total Estimated Ore Reserves as
of December 31, 2003 under Ore Reserves and Mining Rights below. 20




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The following maps show the location of the operating mines, non-operating mines, currently
undeveloped properties and processing and other facilities at our Ontario and Manitoba operations. Ontario Operations
Location of Operating Mines, Non-Operating Mines, Undeveloped Properties and
Processing and Other Facilities (ONTARIO OPERATIONS MAP) 21




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Manitoba Operations
Location of Operating Mines, Non-Operating Mines and Processing and Other Facilities (MANITOBA OPERATIONS MAP) For further information on the development projects or undeveloped properties at our Ontario
and Manitoba operations, see Exploration and Mine Development below. 22




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The tables below set forth our annual mine production in thousands of tonnes by operating mine
(or on an aggregate basis for PT Inco since it has mining areas rather than mines) and the average
percentage grades of certain metals (nickel and copper), for our Ontario operations, our Manitoba
operations and PT Inco for 2004, 2003 and 2002. For our Manitoba and Ontario operations, the
production and average grades represent the mine product delivered to those operations respective
processing plants and do not include adjustments due to beneficiation, smelting or refining. The
mine production at PT Inco represents the product from PT Incos dryer kilns (Dry Kiln Product)
delivered to PT Incos smelting operations and does not include nickel losses due to smelting. Annual Mine Production
(in thousands of tonnes, except percentages) 2004
    
    
    2003
    
    
    2002Ontario Operations Operating MinesCopper Cliff North Mine
    
    Mine production
    
    
    1,085
    
    
    
    701
    
    
    
    986Copper (per cent)
    
    
    1.07
    
    
    
    1.16
    
    
    
    1.29Nickel (per cent)
    
    
    1.04
    
    
    
    1.21
    
    
    
    1.18Copper Cliff South Mine
    
    Mine production
    
    
    838
    
    
    
    769
    
    
    
    1,035Copper (per cent)
    
    
    2.45
    
    
    
    2.50
    
    
    
    2.27Nickel (per cent)
    
    
    1.92
    
    
    
    1.80
    
    
    
    1.89Crean Hill Mine(1)
    
    Mine production
    
    
    
    
    
    
    
    
    
    
    261Copper (per cent)
    
    
    
    
    
    
    
    
    
    
    1.29Nickel (per cent)
    
    
    
    
    
    
    
    
    
    
    1.75Creighton Mine
    
    Mine production
    
    
    968
    
    
    
    713
    
    
    
    912Copper (per cent)
    
    
    1.48
    
    
    
    1.53
    
    
    
    1.53Nickel (per cent)
    
    
    2.06
    
    
    
    2.10
    
    
    
    2.14Stobie Mine
    
    Mine production
    
    
    3,005
    
    
    
    2,222
    
    
    
    2,792Copper (per cent)
    
    
    0.83
    
    
    
    0.83
    
    
    
    0.91Nickel (per cent)
    
    
    0.88
    
    
    
    0.90
    
    
    
    0.98Garson Mine
    
    Mine production
    
    
    610
    
    
    
    434
    
    
    
    584Copper (per cent)
    
    
    1.04
    
    
    
    1.10
    
    
    
    1.15Nickel (per cent)
    
    
    1.74
    
    
    
    1.87
    
    
    
    1.92McCreedy East/Coleman Mine
    
    Mine production
    
    
    1,210
    
    
    
    870
    
    
    
    1,084Copper (per cent)
    
    
    3.05
    
    
    
    3.57
    
    
    

    3.19Nickel (per cent)
    
    
    1.69
    
    
    
    1.78
    
    
    
    1.69Gertrude Mine
    
    Mine production
    
    
    504
    
    
    
    453
    
    
    
    156Copper (per cent)
    
    
    0.33
    
    
    
    0.36
    
    
    
    0.37Nickel (per cent)
    
    
    0.95
    
    
    
    1.01
    
    
    
    1.09Total Ontario Operations
    
    Mine production
    
    
    8,220
    
    
    
    6,162
    
    
    
    7,810Copper (per cent)
    
    
    1.41
    
    
    
    1.53
    
    
    
    1.57Nickel (per cent)
    
    
    1.33
    
    
    
    1.39
    
    
    
    1.45Manitoba Operations Operating MinesThompson Mine
    
    Mine production
    
    
    1,377
    
    
    
    1,393
    
    
    
    1,433Nickel (per cent)
    
    
    2.10
    
    
    
    2.21
    
    
    
    2.58Birchtree Mine
    
    Mine production
    
    
    962
    
    
    
    640
    
    
    
    425Nickel (per cent)
    
    
    1.64
    
    
    
    1.83
    
    
    
    1.78Total Manitoba Operations
    
    Mine production
    
    
    2,339
    
    
    
    2,033
    
    
    
    1,858Nickel (per cent)
    
    
    1.91
    
    
    
    2.09
    
    
    
    2.40PT Inco Operations
    
    Mine production
    
    
    4,350
    
    
    
    3,891
    
    
    
    3,137Nickel (per cent)
    
    
    1.85
    
    
    
    1.91
    
    
    
    1.71
   (1)
    
    Crean Hill Mine was closed in 2002. 
 Concentrating, Smelting and Refining The conversion of nickel ore mined from Incos sulphide deposits in Canada into
commercially marketable products requires various processing and refining steps undertaken at
concentrators, smelters and refineries. The ore is first crushed and ground, the sulphides are
separated into concentrates, and the concentrates are then smelted to produce nickel matte, an
intermediate product 23




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##### Table of Contents



containing approximately 75 per cent nickel plus copper. The matte is then refined to produce
primary nickel and copper products. Incos processing facilities in operation during 2004 in the Sudbury area included a
concentrator, a combined nickel and copper smelter, matte processing facilities, a nickel refinery,
a copper refinery, a silver refinery, a sulphuric acid plant and a sulphur dioxide liquefaction
plant. Nickel matte produced in Sudbury is refined in Sudbury and other locations into nickel
pellets, nickel powders, UTILITY5 nickel, nickel discs and Nickel Oxide Sinter
756, a product containing approximately 75 per cent nickel. In Thompson, Manitoba, we
have a concentrator, a nickel smelter and an electrolytic nickel refinery. Certain nickel products
produced in Sudbury and Thompson are finished at Port Colborne, Ontario. Finished nickel is also produced at our refinery at Clydach, Wales. The Clydach refinery
processes material supplied from our operations in Canada. At Port Colborne, we also operate an
electrocobalt refinery and a precious metals upgrading facility. The majority of our silver
production is refined at Copper Cliff, Ontario and our gold production is refined in Canada under a
tolling arrangement with the Royal Canadian Mint. This by-product production is reflected in the
tables under Sales and Deliveries above. Our refinery at Acton, England produces PGMs from
upgraded concentrates from our operations in Canada and from the recovery, through toll-refining,
of materials containing PGMs supplied by unaffiliated customers. Incos Ontario operations, Manitoba operations and operations in the United Kingdom form a
business unit known as our Canadian and UK Operations. This organization, which was implemented in
2001, facilitates the sharing of knowledge and helps to optimize the use of certain of our
facilities and resources. The following table shows our total production of finished nickel and copper from our primary
metals facilities for the five years ended December 31, 2004: Finished Nickel and Copper Production2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in tonnes)Nickel
    
    
    236,817
    
    
    
    187,173
    
    
    
    209,728
    
    
    
    207,077
    
    
    
    202,806Copper
    
    
    124,456
    
    
    
    91,134
    
    
    
    111,787
    
    
    
    116,255
    
    
    
    114,397
 See Mining and Production  General above for information regarding Incos
expected nickel and copper production for 2005. Of the amounts reported in the table above as finished nickel production, the following table
shows the amounts of such total finished nickel production from nickel-in-matte produced by PT Inco
for the five years ended December 31, 2004: Finished Nickel from PT Inco Matte2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in tonnes)Nickel
    
    
    75,087
    
    
    
    65,704
    
    
    
    61,692
    
    
    
    61,856
    
    
    
    58,356
 Incos worldwide nickel processing capacity, including capacity at our majority-owned
subsidiaries, is adequate to refine the production from our mines at current rates of mine
production. We also have contractual nickel refining arrangements with nickel refiners in Asia in
which we have minority equity interests. These include an arrangement with Taiwan Nickel for the
supply of intermediate products produced by Inco for Taiwan Nickels refining operations, and a
joint venture, also involving the supply of intermediate products produced by Inco, with Korea
Nickel which, in turn, produces UTILITY nickel. The other shareholders of Taiwan Nickel are a
number of Taiwanese investors and the other shareholders of Korea Nickel are Korea Zinc Company,
Ltd. (Korea Zinc), a number of individuals associated with Korea Zinc and entities associated
with Pohang Iron and Steel Co., Ltd. All production facilities at our operations in Ontario, Manitoba, Clydach and Acton are owned
by us and are located on property which we own or with respect to which we have contractual rights
to acquire ownership. Permission from the Ontario government is required for the export of intermediate products
derived from Ontario ores. Our practice is to meet with government officials prior to the
expiration of each of the required export licences to discuss relevant aspects of the export
procedure. In December 1995, the Ontario government granted permission for us to export nickel
oxide sinter and nickel sulphide matte, as well as nickel sulphate residue, to Clydach until
December 31, 2005. During 2004, we refined about 16 per cent of   5
    
    Inco trademark6
    
    Inco trademark 24




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##### Table of Contents



our primary nickel production at our refinery in Clydach from intermediate products derived
from our Ontario ores. The Ontario government also granted us permission to export semi-refined
PGMs concentrate to our Acton refinery until December 31, 2005. We currently anticipate that we
will be granted permission to continue to export these materials for additional years after the
expiry of these current permits. The Province of Manitoba currently does not restrict the export
of products from our Thompson mines. As discussed under Ore Reserves and Mining Rights and
Voiseys Bay Nickel Company Limited  Negotiations with the Provincial Government
below, there are certain restrictions and limitations relating to the export of intermediate
products from the Province of Newfoundland and Labrador. 25




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##### Table of Contents



Ore Reserves and Mining Rights 
 Ore Reserves The following tables show, as of December 31, 2004 and 2003, our estimates of our (i)
proven ore reserves, (ii) probable ore reserves, and (iii) the aggregate of proven and probable ore
reserves at our operating mines, non-operating mines, undeveloped properties and development
projects at our Ontario operations, our Manitoba operations, the Voiseys Bay project in the
Province of Newfoundland and Labrador, PT Inco in Indonesia and the Goro project in New Caledonia
and the estimated respective average nickel, copper, cobalt, platinum, palladium and gold metal
grades, where significant, of each such total amount as of the end of the periods indicated. Ore
reserve estimates referred to under Exploration and Mine Development below or elsewhere in
this Report are included in these tables. Total Estimated Ore Reserves as of December 31, 2004
(in millions of tonnes (Mt) except as indicated) (1)(2)(3)(7) Platinum
    
    
    Palladium
    
    
    GoldQuantity
    
    
    Nickel
    
    
    Copper
    
    
    Cobalt
    
    
    (grams/
    
    
    (grams/
    
    
    (grams/Class
    
    
    (Mt)
    
    
    (per cent)
    
    
    (per cent)
    
    
    (per cent)
    
    
    tonne)
    
    
    tonne)
    
    
    tonne)ONTARIO OPERATIONS(4)(6)Operating Mines
    
    Proven
    
    
    70
    
    
    
    1.24
    
    
    
    1.34
    
    
    
    0.04
    
    
    
    0.65
    
    
    
    0.71
    
    
    
    0.24Probable
    
    
    59
    
    
    
    1.35
    
    
    
    1.59
    
    
    
    0.03
    
    
    
    1.02
    
    
    
    1.13
    
    
    
    0.39Total/Average
    
    
    129
    
    
    
    1.29
    
    
    
    1.46
    
    
    
    0.04
    
    
    
    0.82
    
    
    
    0.91
    
    
    
    0.32Non-Operating Mines
    
    Proven
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    44
    
    
    
    1.09
    
    
    
    0.87
    
    
    
    0.04
    
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.20Total/Average
    
    
    44
    
    
    
    1.09
    
    
    
    0.87
    
    
    
    0.04
    
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.20Undeveloped Properties
    
    Proven
    
    
    1
    
    
    
    1.09
    
    
    
    0.50
    
    
    
    0.03
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.03Probable
    
    
    3
    
    
    
    1.41
    
    
    
    0.97
    
    
    
    0.05
    
    
    
    0.45
    
    
    
    0.34
    
    
    
    0.07Total/Average
    
    
    4
    
    
    
    1.38
    
    
    
    0.93
    
    
    
    0.05
    
    
    
    0.41
    
    
    
    0.32
    
    
    
    0.07Total
    
    Proven
    
    
    71
    
    
    
    1.24
    
    
    
    1.34
    
    
    
    0.04
    
    
    
    0.65
    
    
    
    0.72
    
    
    
    0.24Probable
    
    
    106
    
    
    
    1.24
    
    
    
    1.28
    
    
    
    0.04
    
    
    
    0.79
    
    
    
    0.86
    
    
    
    0.31Total/Average
    
    
    177
    
    
    
    1.24
    
    
    
    1.30
    
    
    
    0.04
    
    
    
    0.72
    
    
    
    0.79
    
    
    
    0.27MANITOBA OPERATIONS(4)(6)Operating Mines
    
    Proven
    
    
    14
    
    
    
    2.08
    
    
    
    0.14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    13
    
    
    
    2.13
    
    
    
    0.14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    27
    
    
    
    2.10
    
    
    
    0.14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PT INCO(5)(6)Mining Areas
    
    Proven
    
    
    88
    
    
    
    1.84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    20
    
    
    
    1.81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    108
    
    
    
    1.83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    VOISEYS BAY PROJECT(4)(6)Development Property
    
    Proven
    
    
    29
    
    
    
    3.05
    
    
    
    1.77
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    3
    
    
    
    0.76
    
    
    
    0.45
    
    
    
    0.04
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    32
    
    
    
    2.82
    
    
    
    1.54
    
    
    
    0.14
    
    
    
    
    
    
    
    
    
    
    
    GORO PROJECT(5)(6)Development Property
    
    Proven
    
    
    73
    
    
    
    1.39
    
    
    
    
    
    
    
    0.13
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    22
    
    
    
    2.01
    
    
    
    
    
    
    
    0.09
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    95
    
    
    
    1.53
    
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    
    
    
    
    
 26




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##### Table of Contents



Total Estimated Ore Reserves as of December 31, 2003
(in millions of tonnes (Mt) except as indicated) (1)(2)(3)(7) Platinum
    
    
    Palladium
    
    
    GoldQuantity
    
    
    Nickel
    
    
    Copper
    
    
    Cobalt (9)
    
    
    (grams/
    
    
    (grams/
    
    
    (grams/Class
    
    
    (Mt)
    
    
    (per cent)
    
    
    (per cent)
    
    
    (per cent)
    
    
    tonne)
    
    
    tonne)
    
    
    tonne)ONTARIO OPERATIONS(4)(6)Operating Mines
    
    Proven
    
    
    90
    
    
    
    1.42
    
    
    
    1.66
    
    
    
    0.05
    
    
    
    0.75
    
    
    
    0.83
    
    
    
    0.29Probable
    
    
    52
    
    
    
    1.16
    
    
    
    1.42
    
    
    
    0.03
    
    
    
    1.08
    
    
    
    1.18
    
    
    
    0.45Total/Average
    
    
    142
    
    
    
    1.33
    
    
    
    1.57
    
    
    
    0.04
    
    
    
    0.87
    
    
    
    0.96
    
    
    
    0.35Non-Operating Mines
    
    Proven
    
    
    1
    
    
    
    1.60
    
    
    
    0.69
    
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.03Probable
    
    
    38
    
    
    
    1.04
    
    
    
    0.92
    
    
    
    0.04
    
    
    
    0.55
    
    
    
    0.56
    
    
    
    0.21Total/Average
    
    
    39
    
    
    
    1.06
    
    
    
    0.91
    
    
    
    0.04
    
    
    
    0.54
    
    
    
    0.55
    
    
    
    0.21Undeveloped Properties
    
    Proven
    
    
    1
    
    
    
    1.09
    
    
    
    0.50
    
    
    
    0.03
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.03Probable
    
    
    5
    
    
    
    1.50
    (8)
    
    
    0.60
    
    
    
    0.05
    
    
    
    0.25
    
    
    
    0.59
    
    
    
    0.14Total/Average
    
    
    6
    
    
    
    1.47
    (8)
    
    
    0.60
    
    
    
    0.05
    
    
    
    0.24
    
    
    
    0.56
    
    
    
    0.13Total
    
    Proven
    
    
    91
    (8)
    
    
    1.42
    
    
    
    1.64
    
    
    
    0.05
    
    
    
    0.75
    
    
    
    0.82
    
    
    
    0.31Probable
    
    
    96
    (8)
    
    
    1.13
    
    
    
    1.18
    
    
    
    0.04
    
    
    
    0.82
    
    
    
    0.89
    
    
    
    0.34Total/Average
    
    
    187
    
    
    
    1.27
    
    
    
    1.41
    
    
    
    0.04
    
    
    
    0.79
    
    
    
    0.86
    
    
    
    0.31MANITOBA OPERATIONS(4)(6)Operating Mines
    
    Proven
    
    
    20
    
    
    
    2.25
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    14
    
    
    
    2.11
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    34
    
    
    
    2.19
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PT INCO(5)(6)Mining Areas
    
    Proven
    
    
    62
    
    
    
    1.81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    45
    
    
    
    1.80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    107
    
    
    
    1.81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    VOISEYS BAY PROJECT(4)(6)Development Property
    
    Proven
    
    
    28
    
    
    
    3.02
    
    
    
    1.77
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    2
    
    
    
    0.77
    
    
    
    0.55
    
    
    
    0.04
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    30
    
    
    
    2.85
    
    
    
    1.68
    
    
    
    0.14
    
    
    
    
    
    
    
    
    
    
    
    GORO PROJECT(5)(6)Development Property
    
    Proven
    
    
    44
    
    
    
    1.41
    
    
    
    
    
    
    
    0.13
    
    
    
    
    
    
    
    
    
    
    
    Probable
    
    
    13
    
    
    
    1.92
    
    
    
    
    
    
    
    0.08
    
    
    
    
    
    
    
    
    
    
    
    Total/Average
    
    
    57
    
    
    
    1.52
    
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    Estimated reserves represent, in accordance with applicable rules and regulations of the
SEC, including the definitions thereunder, that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the reserve determination.
Proven reserves are reserves for which (i) the quantity is computed from dimensions revealed
in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the
results of detailed sampling and (ii) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is so well defined that size, shape, depth and
mineral content of reserves are well-established. Probable reserves are reserves for which
the quantity and grade and/or quality are computed from information similar to that used for
proven reserves, but the sites for inspection, sampling, and measurement are farther apart or
are otherwise less adequately spaced. The degree of assurance, although lower than that for
proven reserves, is high enough to assume continuity between points of observation.For the purposes of such rules and regulations, the ore reserves at the Ontario and Manitoba
operations operating mines are estimated based on, among other factors, operating costs, and
the ore reserves at such operations non-operating mines are estimated based on, among other
factors, mining costs derived from certain mining feasibility studies. Total reserve estimates
are based on a number of assumptions such as mining methods, production and other costs, metal
recovery rates and ore recovery and dilution factors. The economic viability of the estimated
ore reserves as of year-end 2004 were determined using the following approximately three-year average nickel
prices and exchange rates for the period from January 1, 2002 to November 30, 2004: nickel at
$4.56 per pound (London Metal Exchange (LME) cash nickel price), with adjustments made for the
premiums on specialty products realized in our Ontario and Manitoba operations, and discounts
for the matte product produced at PT Inco and the planned nickel oxide product to be produced at
the Goro project; copper at $0.95 per pound; cobalt at $12.07 per pound for cobalt metal with
adjustments made for other cobalt products; platinum at $679 per troy ounce; palladium at $256
per troy ounce; and gold at $358 per troy ounce; and with respect to currencies, the latest
three-year average U.S. 27




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##### Table of Contents



dollar-Canadian dollar exchange rate of $1.00 = Cdn.$1.43, and the latest three-year average
U.S. dollar-Indonesian rupiah (Rp) exchange rate of $1.00 = Rp 8,934.(2)
    
    The Company, in accordance with applicable Canadian securities regulatory requirements, also
estimates its mineral reserves (as well as mineral resources) in compliance with the
definitions under the CIM Standards on Mineral Resources and Reserves Definitions and
Guidelines adopted by the CIM Council of the Canadian Institute of Mining, Metallurgy and
Petroleum in August 2000 (the CIM Guidelines). If the reserve numbers above estimated as of
year-end 2004 and 2003 were prepared in accordance with such definitions for mineral
reserve, probable mineral reserve and proven mineral reserve in the CIM Guidelines, there
would be no substantive differences in such estimates from the total estimates for proven and
probable ore reserves in the tables above or with respect to the other reserve estimates set
forth elsewhere in this Report. For the purposes of such Guidelines, the Ontario and Manitoba
operations ore reserves at their operating mines are estimated based on, among other factors,
operating costs, and the ore reserves estimates at such operations non-operating mines are
based on, among other factors, mining costs derived from certain mining feasibility studies.
Total ore reserve estimates are based on a number of assumptions such as mining methods,
production and other costs, metal recovery rates and ore recovery and dilution factors. We
develop our business plans using a time horizon that reflects our view of long-term metals
prices over the relevant historical cycle for each metal and other key long-term assumptions.
These long-term metals prices and other key assumptions are different (in some cases
materially different) than the latest three-year averages for the metals we produce and
relevant exchange rates. However, if these long-term assumptions for metals prices and other
key related assumptions were used in developing these estimates rather than the approximately three-year
averages referred to in Note (1) above, the ore reserves estimates in the above table as of
year-end 2004 would also be economic and these estimates would not change to any significant
degree given the nature of the mineralization in our deposits and the relative importance of a
number of other factors that are used in developing these estimates. For 2003, we used the
following long-term metals prices and other assumptions for the estimated ore reserves as of
year-end 2003: nickel at $3.20 per pound (LME cash nickel price) plus a $0.20 per pound
volatility premium (where the volatility premium represents an estimate of the net change
taking into account the nickel price volatility and probability of exploiting additional ore
reserves contained in our various orebodies) for the Ontario and Manitoba operations and for
PT Incos nickel-in-matte and, based upon the timing of these estimates, a $3.20 LME per pound
cash nickel price was used for the Goro and Voiseys Bay projects, with adjustments made for
special product premiums realized by the Ontario and Manitoba operations; copper at $0.90 per
pound; cobalt at $7.00 per pound; platinum at $420 per troy ounce; palladium at $250 per troy
ounce; and gold at $275 per troy ounce; a U.S. dollar-Canadian dollar exchange rate of was
$1.00 = Cdn.$1.52 and a U.S. dollar-Indonesian rupiah (Rp) exchange rate of $1.00 = Rp 9,500.(3)
    
    For the purpose of estimating and reporting Incos ore reserves, all persons preparing and/or
reviewing the estimates are designated as responsible persons for internal requirements. As
part of our internal processes and procedures in developing these estimates, the role of each
such responsible person is to review those key parts of the estimated ore reserves for which
such person has the appropriate professional expertise and/or experience, and/or supervisory
or management responsibility to ensure that the estimates are reasonable, economically viable
and consistent with our production plans and that they are not aware of any environmental,
permitting, legal, ownership, taxation, political or social issues that would materially
affect the estimates.In accordance with applicable Canadian securities regulatory requirements, including National
Instrument 43-101, Standards of Disclosure for Mineral Projects, Mr. S. Nicholas Sheard,
Vice-President of Exploration, Dr. Olivier Tavchandjian, Principal Geologist, Mineral Reserves
and Mineral Resources, and Dr. Lawrence B. Cochrane, Director of Mines Exploration, each as a
qualified person within the meaning of such National Instrument (which means generally an
individual with relevant experience as an engineer or geoscientist who is also a member in good
standing of a recognized engineering or similar professional association) indirectly supervised
the preparation of the ore reserves estimates as of December 31, 2004 and other information set
forth in the above tables relating to 2004 and each has, in accordance with the requirements of
such National Instrument, conducted either directly by himself or indirectly through employees
of the Company reporting directly or indirectly to him, a comprehensive review and confirmation
of the application of the detailed procedures, systems and processes the Company has developed
and implemented for the purpose of verifying such data. Each of Mr. Sheard, Dr. Tavchandjian
and Dr. Cochrane, as well as the responsible persons described above and other staff of the
Company involved in the process of developing these estimates, also periodically check the
adequacy of such procedures, systems and processes which are intended to provide sufficient
verification of such data based upon recognized sampling, analytical testing, modelling and
other procedures in the mining industry. For the ore reserves estimates as of December 31, 2003
and other information set forth in the above table relating to 2003 and estimates set forth elsewhere in this Report such qualified persons
were (i) Dr. Cochrane for such ore reserve estimates for the Ontario and Manitoba operations,
the Voiseys Bay project and PT Inco, (ii) Mr. Robert C. Osborne, Consulting Geologist,
Laterites, for such ore reserve estimates for PT Inco, and (iii) Mr. Robert A. Horn, who served
as Vice-President, Exploration from 1995 until mid-November 2003 and continued as a full-time
employee until the end of January 2004, for such ore reserves estimates for the Goro project.(4)
    
    The ore reserve estimates for the Ontario and Manitoba operations are of in-place material
after adjustments for mining dilution and mining recovery. No adjustments have been made to
these estimates for metal losses due to processing (beneficiation, smelting and refining).
For the Ontario operations, the average metal recoveries after processing in 2004 were as
follows: nickel  76.6 per cent, copper  90.0 per cent, platinum  75.1 per cent, palladium 
77.1 per cent and gold  68.2 per cent. For the Manitoba operations, the average metal
recoveries after processing in 2004 were as follows: nickel  86.3 per cent, copper  84.3 per
cent and cobalt  41.8 per cent. For 2003, the average metal recoveries after processing at
our Ontario operations were as follows: nickel  74.5 per cent, copper  89.4 per cent,
platinum  69.5 per cent, palladium  69.7 per cent and gold  62.9 per cent. The metal
recoveries for each operating mine, non-operating mine and undeveloped property vary depending
on the metal grades and mineralogy for each mine or undeveloped property. The estimated ore
reserves include factors for dilution and ore losses due to mining. The ore reserve estimates
for the Voiseys Bay project are of in-place material after adjustments for mining dilution
and losses due to mining recovery. No adjustments have been made to the ore reserve estimates
for metal losses due to processing (beneficiation, smelting and refining). Overall processing
recoveries for the Voiseys Bay project are expected to be 82 per cent for nickel, 94 per cent
for copper, and 39 per cent for cobalt. The metal recoveries from beneficiation were
determined from extensive pilot plant tests. Smelting and refinery recoveries are based on
actual recoveries at the Ontario and Manitoba operations, given that the Voiseys Bay
nickel-containing concentrates planned to be produced over the 2006-2011 period are to be
processed at these operations, and planned metal recoveries at the proposed hydrometallurgical
facility post 2011. The realized metal recoveries in each zone may vary depending on the
metal grades and the mineralogy of the ore in each zone. 28




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##### Table of Contents



(5)
    
    The ore reserve estimates for PT Inco represent Dry Kiln Product. The estimated ore reserves
at PT Inco include factors for dilution and ore losses due to mining and screening recovery
during ore preparation. The estimated ore reserves do not include nickel losses due to
smelting. The average nickel recovery after processing used for PT Incos 2004 and 2003 ore
reserve estimate was 90.0 per cent. For the Goro project, the ore reserve estimates include
factors for dilution due to mining and for ore losses due to mining recovery and screening
recovery during feed preparation. The ore reserve is estimated using a screened fraction
recovered of minus 50 millimetres. The ore reserve estimates do not include the nickel or
cobalt losses due to processing. The planned processing recoveries for the Goro project are
anticipated to be 93.0 per cent for nickel and 90.0 per cent for cobalt.(6)
    
    At the Ontario operations, the drill-spacing for the estimated ore reserves classified as
proven ranges from 30 metres by 46 metres to 15 metres by 23 metres, averaging 23 metres by
34 metres. The drill-spacing for the estimated ore reserves classified as probable ranges
from 61 metres by 91 metres to 30 metres by 61 metres, averaging 46 metres by 76 metres. The
classifications are also dependent on the mining method and mining selectivity. At the
Manitoba operations, the drill-spacing for the estimated ore reserves classified as proven
ranges from 15 metres by 18 metres to 12 metres by 12 metres, averaging 14 metres by 15
metres. The drill-spacing for the estimated ore reserves classified as probable ranges from
30 metres by 30 metres to 61 metres by 61 metres, averaging 45 metres by 45 metres. The
classifications are also dependent on the mining method and mining selectivity. For the
Voiseys Bay project, the drill-spacing for the ore estimated reserves classified as proven
averages 50 metres by 25 metres. The drill-spacing for the estimated ore reserves classified
as probable averages 50 metres by 50 metres. For PT Inco, the drill-spacing for the
estimated ore reserves classified as proven ranges from 100 metres by 100 metres to 50
metres by 50 metres, with the majority of proven ore reserves drilled at 100 metres by 100
metres, whereas the drill-spacing for the estimated ore reserves classified as probable
ranges from 150 metres by 150 metres to 100 metres by 100 metres, with the majority of proven
ore reserves drilled at 150 metres by 150 metres. For the Goro project, the average
drill-spacing for the estimated ore reserves classified as proven is 100 metres by 100
metres and 100 metres by 200 metres for the estimated ore reserves classified as probable.(7)
    
    All estimated proven and probable ore reserves referred to in this Report, including the
estimates referred to under Exploration and Mine Development below, are included in the
tables above.(8)
    
    Certain rounding and other errors have been corrected and these percentages are therefore
different from the percentages previously disclosed in our Report on Form 10-K for 2003.(9)
    
    Cobalt percentages at our Ontario operations have been included in the table for 2003 to be
consistent with the inclusion of these percentages in the table for 2004. At our Ontario operations, the estimated combined proven and probable ore reserves
declined from 2003 to 2004 by 10 million tonnes, from 187 million tonnes to 177 million tonnes.
The decrease was primarily due to mining (8 million tonnes). At our Manitoba operations, the estimated combined proven and probable ore reserves declined
from 2003 to 2004 by 7 million tonnes, from 34 million tonnes to 27 million tonnes. This reduction
was primarily due to mining (2 million tonnes) and the removal from the production schedule of a
portion of the estimated ore reserves contained in pillars and remnant areas. At Voiseys Bay, the estimated combined proven and probable ore reserves increased by 2
million tonnes from 2003 to 2004, as a result of incorporating additional drilling information and
minor revisions to the planned open pit mine. At PT Inco, the estimated combined proven and probable ore reserves did not change to any
significant degree between 2003 and 2004 and the year-end 2004 estimate reflected a slightly higher
nickel grade after accounting for mining removal and new drilling information. In 2003, the
estimated combined probable ore reserves were increased by 16 million tonnes as a result of ongoing
exploration at PT Incos Petea mining area. At Goro, the estimated combined proven and probable ore reserves increased by 38 million
tonnes from 2003 to 2004 due to additional drilling completed in 2004. The proven and probable ore
grade increased slightly from 1.52 per cent to 1.53 per cent. At Inco, the economic test used in establishing ore reserves is performed using a financial
model encompassing all operating processes necessary to produce a saleable product or products.
For all the operations and projects, this economic model is a cash flow evaluation based on the
production plan, which demonstrates our intent to mine. The production schedule is determined
based on a variable cut-off grade and a number of other factors including the nature of deposit
mineralization, plant capacities and optimizing the benefit of the capital investment. The
economic viability of the ore reserve estimates is based on mining plans for the operating business
units and full feasibility studies for development projects. At the Ontario and Manitoba operations, all costs are based upon Incos applicable annual
operating plan. Processing costs include operating, depreciation and sustaining capital costs and
are updated annually to reflect the assumptions for such costs included in Incos current annual or
longer term (usually five-year) operating plans. Plant overhead costs are also updated annually
with plant throughput assumed to remain constant. Corporate costs include selling, general and
administration costs, charges for stand-by mines 29




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##### Table of Contents



and demolition expenses. Mining costs include operating and mine overhead, capital and
transportation. For our Ontario and Manitoba operations, metal recoveries are calculated from
models based on process plant recoveries developed as part of our annual operating plans and the
models are updated annually. Block modelling and geostatistical interpolation methods are used to derive the ore reserve
estimates for over 90 per cent of the ore reserves at our Ontario operations. Conventional
(polygonal) methods are used primarily to estimate the ore reserves remaining in pillars for
secondary mining assessments. At our Manitoba operations, block models are used and geostatistical
interpolation methods are used at our Manitoba operations Birchtree Mine and portions of Thompson
Mine. Conventional estimation methods are used for about 40 per cent of the ore reserve estimates
at our Manitoba operations. The mining methods used are generally non-selective and the internal
dilution is included in the mining blocks evaluated in developing the estimates. For the block models, an estimation method, which we believe represents an appropriate
geostatistical approach for the data, is selected and technical checks are incorporated into the
modelling process. Back analysis studies of mined out areas are completed to verify the
appropriateness of polygonal and geostatistical estimation methods and the block models are
verified internally. External auditors have been used to critique our geostatistical techniques
utilized. Standard procedures are used for the polygonal estimation techniques. Sections and
plans employing standardized grading and interpretation procedures are used to select the mining
method and assign mining lines. Mineral tonnages and metal grades are then determined and
appropriate mineability and dilution rates are applied. As noted above, mining costs represent the
cut-off values used to selectively report what mining blocks would be included in our ore reserve
estimates. For the Voiseys Bay project, the geological interpretation of the Voiseys Bay Ovoid zone has
been based on the modelling of the troctolite unit hosting the mineral. Within this model, two
domains of massive sulphide and disseminated mineralization were further defined. The block
dimensions used in the block model are 10 metres by 10 metres by 5 metres vertical. Geotechnical
data derived from core holes drilled in the pit walls were used to design the open pit to mine this
zone. Economic evaluations are based on metal recoveries determined from extensive metallurgical
testing and operating costs estimated in the Voiseys Bay projects March 2003 feasibility study. Due to the different economic contributions from each metal, block net smelter royalty
(BNSR) values have been used instead of a single metal cut-off grade for the open pit definition,
production planning and ore reserve calculations. The BNSR calculations assume constant
concentrate grades with which to calculate smelting, refining and freight charges. Charges in the
BNSR calculation, in addition to smelting, refining, and concentrate shipping charges, include, for
the Voiseys Bay project, a three per cent royalty originally held by Archean Resources Ltd., which
royalty interest was transferred in 2003 to a limited partnership created to hold such royalty
interest and is currently held by two entities, as discussed under Mining and Other Rights below,
and an assumed technical/management fee payable to Inco. The life-of-mine schedule uses a cut-off
value corresponding to the expected milling costs. All blocks with BNSR values less than the
cut-off value were considered as waste. There are no plans for a low-grade stockpile for the Voiseys
Bay project, and, accordingly, no part of the Voiseys Bay estimated ore reserve is considered
stockpile ore. At PT Inco, the assumed nickel price used is discounted for the nickel-in-matte product
produced by PT Inco (representing the selling price received by PT Inco for its nickel-in-matte
product equivalent to a percentage of the LME cash nickel price). Costs are based on annual plant
operating costs (including selling, general and administration costs), and current depreciation and
amortization expenses (adjusted for any future changes). For 2004, operating and fixed costs were
based on PT Incos 2005 annual budget, after normalizing certain costs for long-term usage and
removing certain unusual costs for one-time events (additional pre-stripping, delineation drilling
and equipment rentals) and an adjustment for oil prices to a ten-year average. PT Incos process
plant nickel recovery factor is also based on its annual operating plan and is adjusted each year.
Given the nature of PT Incos laterite deposits and how they are mined, PT Inco does not have
specific operating mines but rather has mining areas. PT Inco from time to time has, however,
referred to its Sorowako West Block and East Block areas (shown on the map below under PT
International Nickel Indonesia Tbk) collectively as its Sorowako mine. The ore reserves for PT Inco are estimated using block modelling techniques and geostatistical
interpolation methods. Standard block sizes are used with different parameters applied to each
deposit and in each of the limonite and saprolite layers. Mining volumes were estimated using a
minimum ore thickness of two metres and material below cut-off grade was classified as internal
waste if it was equal to or less than two metres thick. A minimum of 25 metres by 25 metres
lateral extent criteria was used to classify the ore. The mineral volumes were converted to
tonnages using appropriate wet tonnage factors. Screening recovery factors based on actual
production are applied to convert the run of mine product to equivalent Dry Kiln Product. Mining
recovery and dilution were included in the estimation of the ore reserves. 30




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For the Goro project, the ore reserves were estimated using block modelling based on a
30-metre by 30-metre by one-metre block size. The nickel and cobalt grades, the chemical
components and screen recoveries were interpolated for each block for each of the laterite layers
using recognized mining industry methods. The specific gravity, moisture content and screen size
recoveries of the laterite layers were determined based on data collected during geological and
geotechnical drilling campaigns. Grade simulation models, developed from close-spaced drilling,
were used to simulate variability in the layers thickness and chemistry, that are expected to be
encountered during mining, to estimate the ore loss due to mining and mining dilution. A 1.20 per
cent nickel cut-off grade was used to estimate the ore reserves. The cut-off grade provides a
plant feed that meets the required chemistry of the blended material delivered to the process plant
to provide the planned nickel and cobalt production. The 1.20 per cent nickel cut-off grade was
applied in the limonitic layer only and all material located below that cut-off horizon are planned
to be mined in bulk, without mining selectivity applied, until bedrock is reached. The key processes for developing Incos ore reserve estimates have been enhanced to include
more formalized senior management review and approval of such processes and the preparation of such
estimates. These processes involve, as discussed in Note 3 to the
tables entitled Total Estimated Ore
Reserves as of December 31, 2004 and Total Estimated Ore Reserves as of December 31, 2003 above,
key technical personnel at each of the principal operating units or locations, our corporate
technical group, including our corporate exploration personnel, as well as senior managements
involvement, and have been enhanced as part of the objective of recognizing ore reserve estimating
as a core business process. In addition to internal audits of the processes utilized and the
estimates themselves, we have also retained external auditing firms to review such processes and
estimates. In 2004, external audits were conducted on the ore reserve estimates at Creighton Mine
in Ontario and Birchtree Mine in Manitoba. These audits found no material issues with respect to
the audited ore reserve estimates. 
 Mining and Other Rights The following discussion reflects a summary of the property rights, mining rights,
licences, leases or other concessionary rights to mine for or extract metals and other associated
minerals from the areas that we currently mine or expect to mine as part of our long-term mine
plans in Canada, Indonesia and New Caledonia. With respect to those properties which are not
currently owned but are subject to leases or licenses with finite terms that are not perpetual or
cannot be automatically renewed or extended and on which estimated ore reserves are located and/or
are covered by our current long-term mine plans, we currently believe that we will be able to
obtain renewals or extensions of such leases or licenses, if required as part of our long-term mine
plans on a timely basis. Ontario Operations All operating mines, non-operating mines and undeveloped properties which contain estimated
proven and probable ore reserves for our Ontario operations are on lands owned by us, with the
exception of a portion of Copper Cliff South Mine (known as Kelly Lake) and a portion of the Victor
non-operating mine. These portions of the Copper Cliff South and Victor mines are located on lands
with respect to which we currently hold a licence of occupation. We have applied for a 21-year
lease for each of these two areas and believe that these leases will be granted on a timely basis. In Ontario, we also hold mining rights, surface rights, licences of occupation and mining
claims granted to us by the Province of Ontario. Mining rights are rights to exploit and extract
minerals on, in or under the land, and surface rights are rights to use the surface of the land.
These rights remain in effect so long as we own the land to which these rights apply. We also own
a combination of mining and surface rights covering land leased from the Province of Ontario.
These leased lands, which include a combination of mining and surface rights, are leased for either
10 or 21 years. Annual rentals are paid to the Province to keep the leases in good standing. One
of the 21-year leases that was due to expire in November 2003 was renewed for a further 21-year
term prior to its expiry. Three of the 10-year leases that expired in 2004 were also renewed in
March 2004 for further 10-year terms. The next lease that comes up for renewal is in 2008. Inco
currently holds 165 licences of occupation for mining, hydro electric installations and various
other industrial purposes in Ontario. These licences of occupation allow Inco to use the land in
the manner specified in each license, including the right to dig, excavate and remove ores and
minerals from and under the land. Inco currently also has a number of mining claims in Ontario.
Mining claims represent rights to explore the land covered by the claim. In early March 2001, a
party purported to stake mining claims and then initiated an administrative appeal in the Province
of Ontario effectively contesting the validity of a licence of occupation originally granted to
Inco more than 50 years ago covering a portion of our Kelly Lake deposit which was identified in
1997. The actions taken by this party alleged that our rights under the licence had been lost
because we had not made timely payments in accordance with the then applicable requirements for the
periodic payment of the rent required to be paid to the province to maintain the licence. All of
the appeals initiated by this party contesting the license were dismissed during 2001 and 2002. As
a result of the dismissal of the appeals and the enactment of new legislation in Ontario in 2002,
we do not anticipate any future challenges to the validity of such licences on the grounds alleged
by this party. 31




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Manitoba Operations Incos landholdings or mining rights in Manitoba consist of order-in-council leases (OIC
Leases), mineral leases and mining claims. OIC Leases were negotiated as part of an agreement
between Inco and the Province of Manitoba entered into in 1956 covering the development of the
Thompson, Manitoba nickel deposits by Inco. OIC Leases entitle the lessee to explore for, and
mine, all minerals in the subsurface (except hydrocarbons, industrial minerals and surficial
deposits that are not incidental to the mining, milling, smelting and refining processes). OIC
Leases also provide the lessee with the right to erect buildings and structures necessary for its
operations and provide for a right of access over and upon the lands. OIC Leases provide for an
initial 21-year term and two subsequent guaranteed renewals of 21 years each, for a total
guaranteed lease period of 63 years. Subsequent lease renewals beyond the three guaranteed 21-year
terms can be granted at the discretion of the Province of Manitoba. Incos OIC Leases were
initially surveyed and made effective over a six-year period from 1957 to 1962. All of our current
OIC Leases, including certain leases that were renewed in September 2004, have now been renewed
twice (each is in its third guaranteed 21-year term) and remain in effect through the 2020-2025
period. These include the OIC Leases that cover the current area of Thompson Mine which were
renewed in 2001 and the OIC Leases that cover the eastern and depth extensions of Thompson Mine
which were renewed in September 2004. Mineral leases are 21-year leases that are renewable at the
discretion of the Province of Manitoba. Inco holds seven mineral leases in the Thompson, Manitoba
nickel belt. These mineral leases, which convey to Inco the exclusive right to the minerals (other
than quarry minerals) that occur on or under the land covered by these leases and access rights to
erect buildings and structures (including shafts) to mine within the limits of the leases, remain
in effect until April 1, 2013. Inco also holds mining claims, a right issued by the Province of
Manitoba under provincial legislation which conveys to the holder the exclusive right to the
minerals (other than quarry minerals) that occur on or under the land covered by the claim and
access rights to explore for and develop minerals owned by the Province. A mining claim does not,
however, entitle the holder to extract minerals from the land covered by the claim. In order to
extract minerals from the land covered by a mining claim, the holder must obtain a mineral lease
from the Province of Manitoba. All of our Manitoba operations operating mines and all of the mineral rights for all of their
mines which contain estimated proven and probable ore reserves are on properties covered by OIC
Leases and mineral leases. Thompson Mine is located on land covered by OIC Leases that are due for
renewal in 2022 and the eastern and depth extensions of Thompson Mine are covered by OIC Leases
that are due for renewal in 2025. Birchtree Mine is located on land covered by both OIC Leases
which are due for renewal in 2022 and three mineral leases which are in good standing until April
1, 2013. Since the renewal of these OIC Leases would be beyond the three guaranteed 21-year terms,
renewals can be applied for and obtained, at the discretion of the Province of Manitoba, prior to
their current expiry dates. We currently believe that the renewal of these OIC Leases and mineral
leases will be granted before they expire. Voiseys Bay Project The Voiseys Bay project company, VBNC, holds mineral claims (which have been grouped into
mineral licences), a mining lease and surface rights in the Province of Newfoundland and Labrador.
A mineral claim (generally covering a 500-metre by 500-metre parcel of land), issued by the
Province of Newfoundland and Labrador under provincial legislation, gives its holder the exclusive
right to explore for minerals in, on or under the area of land described in the licence, and
obligates the holder to conduct a minimum amount of assessment work (measured by the amount of
money spent) on the land covered by the licence. Up to 256 mineral claims can be grouped together
into one mineral licence. Grouping mineral claims into a single mineral licence allows the holder
to better manage the assessment work required to be done on the land that is the subject of the
claims. Mineral claims and mineral licences are issued for a period of five years and may be
extended for three additional five-year renewal periods, for a total of 20 years. A mineral
licence does not entitle its holder to extract any minerals from the land described in the licence.
All of the Voiseys Bay projects current estimated ore reserves are located on lands covered by
the 25-year mining lease referred to below. In order to extract minerals from the land covered by a mineral licence, the holder of a
mineral licence must obtain a mining lease issued by the province under provincial legislation for
the land covered by such mineral licence. VBNC obtained a mining lease, effective September 30,
2002, for a period of 25 years granting VBNC the exclusive right to extract minerals and carry out
mineral exploration, mining operations or mining processing and development in, on or under the
lands, or part of the lands, covered by the lease so long as VBNC and Inco continue to meet the
terms and conditions of the development agreement, as discussed under Voiseys Bay Nickel Company
Limited below, entered into in October 2002 between VBNC, Inco and Her Majesty the Queen in right
of Newfoundland and Labrador. This mining lease can be renewed for further 10-year terms so long
as VBNC has been in compliance with the terms of the lease and has applied for such renewal at
least three months prior to the expiration of the then current lease. Under the terms of the
mining lease, production is not to exceed on average 2.2 million tonnes of ore annually for the
first 10 years of mining operations and on average 5.5 million tonnes of ore annually thereafter.
The current areas to be mined as part of the Voiseys Bay project and all of the estimated proven
and probable ore reserves for the Voiseys Bay project are held under this mining 32




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lease. We are not aware of any information or other factors at this time which would indicate
that we could not reach agreement with the Province on a new mining lease or an extension when the
current mining lease expires in September 2027. In conjunction with the mining lease, VBNC
received a surface lease entitling it to use certain lands necessary for its mining operations.
Like the mining lease, the surface lease was effective September 30, 2002 for a period of 25 years,
and may be renewed for further 10-year terms. VBNC also holds nine mineral licences, all of which expire over the March-November 2014
period, covering the main claim block of the Voiseys Bay project. These mineral licences have not
been legally surveyed. Geographic coordinates define their locations. To date, sufficient
assessment work has been completed to maintain these mineral licences at least until 2008 so long
as the required renewal fees (currently being approximately Cdn.$100,000 and payable every five
years, subject to increases in such fees based on subsequent renewals) are paid. Additional
assessment work will be required to hold the mineral licences in good standing through 2014. Pursuant to the terms of an option agreement originally entered into in 1993 (the Option
Agreement), Diamond Fields Resources Inc. (Diamond Fields) acquired, upon the exercise of the
option thereunder, all of the mineral claims of Archean Resources Ltd. (Archean) in Labrador and
Archean was granted a royalty, payable quarterly, equal to three per cent of net smelter returns
from mining production from VBNCs Labrador properties, including the Voiseys Bay deposit (the
Royalty), and a three per cent gross royalty (also payable quarterly) on the gross value of raw
diamonds and/or gemstones recovered from these properties. The Option Agreement was assigned to
VBNC by Diamond Fields in 1995. The Royalty is secured by a mortgage on VBNCs Labrador properties
in the maximum aggregate principal amount of $100 million. The mortgage is expressly subordinated
to any mine development financing that might be obtained in the future. In 2003, Archean
transferred the Royalty to a limited partnership controlled by Archeans principal shareholders and
effectively sold up to a 10 per cent interest in the Royalty to a third party. In late February
2005, the remaining 90 per cent interest in the Royalty then held by Archeans principal
shareholders was, through the sale of Archean, acquired by another third party. The Voiseys Bay deposit is within a geographical area that has been the subject of land
claims negotiations between certain aboriginal groups and the Governments of Canada and the
Province of Newfoundland and Labrador. Aboriginal groups asserting land claims in the area include
the LIA and Innu Nation. For further information, see Voiseys Bay Nickel Company Limited
 Negotiations with Aboriginal Groups below. PT Inco Under the original Contract of Work or concessionary agreement between the Republic of
Indonesia and Inco entered into in 1968, and the agreement modifying and extending that Contract of
Work entered into in January 1996 and which sets forth certain provisions which will apply once the
terms of the original Contract of Work expire on March 1, 2008 and through December 28, 2025, PT
Inco, as the sole contractor of the Government of Indonesia in the areas covered by the Contract of
Work, has been granted exclusive rights in these specified areas on the Island of Sulawesi to mine,
process, store, transport and sell all nickel and nickel-containing minerals in any form and all
minerals (except for radioactive materials) found in association with nickel in the areas. The
Contract of Work also grants PT Inco all necessary licences and permits to conduct its operations,
including certain expansions of its operations, as provided for in the Contract of Work. All of PT
Incos mining areas currently containing estimated proven and probable ore reserves are within PT
Incos Contract of Work. Reference is made to PT
International Nickel Indonesia Tbk below for a discussion of certain
recent legislative and regulatory developments in Indonesia. Under the terms of the agreement of modification and extension of PT
Incos original Contract of Work entered into in 1996, the Government of Indonesia has agreed to
give sympathetic consideration to a further renewal or extension of the Contract of Work, upon the
request of PT Inco based upon one or more developments, including a proposal to make a substantial
new investment in PT Inco, or the demonstration by PT Inco of the positive economic and other
benefits to Indonesia provided by PT Inco. We are not aware of any information or other factors at
this time that would indicate that we would not be able to reach agreement on a further extension
of PT Incos Contract of Work before it expires at the end of 2025. Goro Project The Goro project company, Goro Nickel S.A. (Goro Nickel), currently holds 69 mining
concessions in the Massif du Sud (part of the south province of New Caledonia) covering 20,600
hectares authorizing the mining of nickel, cobalt, chrome, iron and manganese, and approximately
26 surface rights. An additional 12 mining concessions are held by Tiebaghi Nickel S.A.S.
outside the Goro project area in a mining domain called Tiebaghi, located in the north province
of New Caledonia. Of the 69 concessions held by Goro Nickel, the Goro project covers 6,042
hectares within seven mining concessions, of which four are perpetual
in term, two are renewable prior to their expiry dates in 2016 and one is renewable prior
to its expiry date in 2051. Goro Nickel has the right to renew these three renewable
concessions for an additional 25-year period when their initial terms expire, provided a
satisfactory technical report is delivered to the authorities five years before the expiry date.
Concessions 33




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generally represent long term permits (mostly 75 year terms, with some having a term up to perpetuity) granted for mining
large deposits which entitle the holder the exclusive right to exploit, extract and mine. A
concession applies to one or several minerals defined by the granting decision along with its
geographical location. The granting of a concession is based on the delineation of an
exploitable orebody made during exploration activities conducted pursuant to permits called
permis de recherchesthen permis dexploitation". Surface rights can be granted
independently of mineral rights. Goro Nickel holds surface rights, known as occupation des
sols", which are rights to use surfaces on or outside mining permits for mining-related
activities, including surfaces of other owners. All of the present estimated proven and
probable ore reserves for the Goro project as at December 31, 2004 are within the mining rights
held as concessions. Reference is made to Goro Nickel S.A.  Prony West Deposit below for a discussion of our
rights to the Prony West area. 
 PT International Nickel Indonesia Tbk 
 General In March 2004, Inco acquired approximately 5.2 million shares in PT Inco from another PT
Inco shareholder. As a result of this acquisition, our ownership of the equity of PT Inco
increased from approximately 59 per cent to approximately 61 per cent. Sumitomo Metal Mining Co.,
Ltd. (SMM) of Japan holds slightly more than 20 per cent and public shareholders hold a total of
slightly more than 18 per cent of the equity of PT Inco. PT Incos shares are traded on the
Jakarta Stock Exchange. Our investment in PT Inco at book value was approximately $392 million at
December 31, 2004, compared with $364 million at December 31, 2003 and 2002. At December 31, 2004,
PT Incos outstanding indebtedness to third party lenders was $115 million, compared with $192
million at December 31, 2003 and $269 million at December 31, 2002. This indebtedness was incurred
primarily to finance the expansion project completed in 1999 referred to below under Contract of
Work Extension and 1999 Expansion of Facilities. In view of its remote location, PT Incos production facilities are almost completely
self-contained. They consist of an open-cast laterite mine, a processing plant with four electric
furnace smelting lines (including a fourth line constructed as part of the PT Inco expansion
project referred to below), thermal and hydroelectric power generating facilities and ancillary
infrastructure, including a townsite, roads, an airport and port facilities. Since 1998, Indonesia has been experiencing economic and political turmoil, some of which has
been compounded by a downturn in the global economy. Indonesias return to economic and political
stability will be dependent to a large extent on the effectiveness of measures taken by the
democratically-elected Government of Indonesia to restore business and confidence, decisions of
international financial institutions, including the World Bank and the International Monetary Fund,
regarding the availability of continued financing to Indonesia and companies operating in
Indonesia, global economic conditions, and a number of other factors, including regulatory and
political developments within Indonesia, which are beyond Incos control or ability to predict. In the Indonesian mining sector, mining companies have been facing several challenges stemming
from the problems being experienced by Indonesia. These challenges include regulatory uncertainty
under regional autonomy legislation which has sought to transfer governmental power in a number of
areas, including taxation and mining regulation, from the central government to regional
governments; overlapping and unclear tax and environmental legislation enacted by central,
provincial and local government authorities; weakness in the banking sector; illegal mining
activities; increasingly militant actions of non-governmental organizations and labour unions; and
continued disputes between mining companies and local communities who are making increasing demands
on mining companies operating in their communities. These other challenges may, in time, affect PT
Incos operations and have, to the extent possible, been taken into account by PT Incos management
in evaluating PT Incos current and future activities in Indonesia. 34




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The map below indicates the
mining areas, the East Block, the West Block and the Petea areas,
where PT Incos estimated proven and probable ore reserves were located for 2004 and 2003, as well as the location of PT Incos
processing plant and hydroelectric facilities and the boundary of the other properties containing
additional mineralized nickel laterite deposits (referred to as Other Concessions on the map)
within the area covered by PT Incos Contract of Work: (MAP IN MINING AREAS) 
 Contract of Work Extension and 1999 Expansion of Facilities As discussed under Ore Resources and Mining Rights above, PT Incos operations are
conducted pursuant to a Contract of Work with the Government of Indonesia under which PT Inco is
the sole contractor of the Indonesian government for the production and marketing of nickel and
associated minerals (other than hydrocarbons and radioactive materials) mined in specified areas on
the Island of Sulawesi. The original Contract of Work was signed in 1968 and in January 1996 PT
Inco signed an agreement with the Government of Indonesia to modify and extend the Contract of Work
to the year 2025, subject to further extensions with the consent of the Government of Indonesia,
from its original expiry date in 2008. The Contract of Work confers upon PT Inco all
authorizations necessary for the development and operation of its nickel project. In late 1999, PT Inco completed a major expansion project that increased its production
capacity by 50 per cent to 68,000 tonnes of nickel-in-matte per year. The expansion involved
improvements to the three existing smelting lines and the construction of a fourth electric furnace
smelting line together with the construction of 93 megawatts of additional low-cost hydroelectric
generating capacity at Balambano, approximately 25 kilometres from PT Incos production facilities
at Sorowako. Since it began operation, the Balambano facility has been able to generate power
consistently above its design capacity due to improved water management practices and higher
reservoir levels and other related factors than were assumed in developing its original design
capacity. Financing for the expansion project was provided by a group of international lenders in the
total principal amount of $340 million for this expansion project and an additional $81 million to
refinance then existing PT Inco debt. The remainder of the original estimated cost of $580 million
for this project had been expected to be provided by PT Incos available cash balances plus cash
generated by existing operations during the construction period. However, as a result of lower
production levels caused by limited rainfall and its adverse effect on hydroelectric power
generation in 1998 and 1997, low nickel prices and increased costs due to construction delays
associated with its new hydroelectric facilities, PT Incos ability to generate cash was
significantly reduced and, as a result, Inco Limited agreed in May 1999 to provide PT Inco with a
loan facility under which $88 million was advanced. These advances were effectively repaid to Inco
Limited in 2002. PT Incos existing hydroelectric facilities were constructed and are currently operated
pursuant to a 1975 decree of the Indonesian 35




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government. This decree, which effectively also covers the Balambano generating capacity
which was part of the expansion project, vests an Indonesian ministry with the right, upon two
years prior written notice to PT Inco, to acquire the hydroelectric facilities. No such notice
has been given. If such right were exercised, the decree also provides that the hydroelectric
facilities would be acquired at their depreciated value subject to the ministry providing PT Inco
with sufficient power to meet its operating requirements, at a rate based on costs plus a normal
profit margin, for the remaining term of the Contract of Work. The new hydroelectric dam referred
to under Operations below to be constructed by PT Inco will also be subject to this decree. PT Incos estimated ore reserves and other deposits at Sorowako on the Island of Sulawesi are
sufficient to support its operations for more than 19 years, and have the potential to continue to
supply PT Incos operations for a number of additional years. Future expansions are possible, as
warranted by market conditions, by developing the extensive laterite nickel deposits within PT
Incos Contract of Work area in the Sorowako outer area and at Bahodopi and Pomalaa, located
approximately 80 kilometres and 200 kilometres, respectively, from PT Incos operations at
Sorowako. Reference is made to "Operations" below for a discussion of
certain recent legislative and regulatory developments in Indonesia. When PT Incos Contract of Work was extended in 1996, PT Inco agreed to several undertakings
with regard to future expansions of its operations. Under one such undertaking, PT Inco agreed,
subject to economic and technical feasibility, to construct production plants at Pomalaa in
Southeast Sulawesi and Bahodopi in Central Sulawesi. The Contract of Work indicated that the first
plant could be in operation by 2005 and the second by 2010, but did not specify which plant was to
be constructed first. As indicated below, this initial expansion has been deemed to be satisfied
through 2008 under the arrangements with PT Aneka Tambang. In February 2003, PT Inco signed a Cooperative Resources Agreement (the CRA) with PT Aneka
Tambang Tbk (PT Antam), an Indonesian government-controlled diversified mining company and
producer of ferronickel whose nickel operations are located near PT Incos Pomalaa deposits within
its Contract of Work area. Under the CRA, PT Inco agreed to supply saprolite, a relatively high
grade of lateritic ore, to PT Antam from certain designated portions of PT Incos contract area in
Pomalaa at prices based on an agreed upon pricing formula. The initial term of the CRA is 36
months starting from the initial delivery of ore by PT Inco to PT Antam. Due to certain delays
experienced by PT Antam in completing the expansion of its facilities that will process this ore,
the initial ore deliveries by PT Inco are now expected to be made to PT Antam in the second quarter of 2005.
The CRA can be extended for one or more additional terms of 12 months each provided PT Antam has
fulfilled its obligations under the CRA. PT Inco has certain unilateral termination rights under
the CRA. In conjunction with the CRA, PT Inco obtained the approval of the Indonesian Minister of
Energy and Mineral Resources with respect to PT Inco meeting certain of its undertakings covering
future mining and processing activities, as noted above, under its Contract of Work by virtue of
entering into the CRA. That approval indicated that PT Inco will be deemed to have satisfied its
obligation to build a commercial plant at Pomalaa until the later of December 31, 2008 or the
termination of the CRA, following which PT Inco will be obligated to deliver a report evaluating
the technical and economic feasibility of constructing such a plant to the Government of Indonesia.
PT Incos obligation under its Contract of Work concerning the construction of a commercial plant
at Bahodopi by 2010, subject to economic and technical feasibility, remains in effect. PT Inco believes that the CRA provides a number of benefits to PT Inco, including (i) enabling
PT Incos saprolite mineral deposits at Pomalaa to be developed on a basis that should provide PT
Inco with a reasonable return, (ii) satisfying certain of PT Incos undertakings under its Contract
of Work, (iii) evidencing, in addition to PT Incos Sorowako expansion in 1999, Incos continuing
commitment to the Indonesian mining sector, and (iv) satisfying certain concerns relating to
regional development expressed by the provincial and regional governments in Southeast Sulawesi
which have assumed a greater role in the development of regional natural resources under
Indonesias regional autonomy program. 36




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Operations Production of nickel-in-matte at PT Inco increased by three per cent to a record level of
72,200 tonnes in 2004 compared with 2003. Production in 2003 was 70,200 tonnes, up 18 per cent
over the 2002 level of 59,500 tonnes, reflecting the processing of higher grade ore and higher
overall production levels in 2003 compared with 2002. Nickel-in-matte, an intermediate product, is
sold by PT Inco primarily into the Japanese market. Approximately 95 per cent of PT Incos
electric power requirements are supplied by its 165-megawatt hydroelectric generating facilities on
the Larona River and its newer 93-megawatt facilities at Balambano which began operation in 2000.
As noted above, the Balambano facility has been able to generate power consistently above its
design capacity due to improved water management practices and higher reservoir levels and other
related factors than were assumed in developing its original design capacity. PT Inco announced
plans in 2004 to construct a third dam on the Larona River at a cost of approximately $150 million.
The new dam is the first stage of a four-year $250 million capital program aimed at raising PT
Incos annual production by 25 per cent to about 200 million pounds of nickel-in-matte by 2009.
The new dam is expected to increase its hydroelectric generating capacity by 33 per cent, or 90
megawatts, annually. PT Inco also required approximately 447,000 tonnes of fuel oil to operate its
dryers, kilns and other oil-fired facilities in 2004. Largely as a result of improved nickel prices, partially offset by increased costs, PT Incos
net earnings were significantly higher in 2004 than in 2003 and 2002. PT Incos net realized price
for nickel-in-matte in 2004 averaged $10,766 per tonne ($4.88 per pound), compared with $7,117 per
tonne ($3.23 per pound) in 2003 and $5,114 per tonne ($2.32 per pound) in 2002. Under PT Incos
long-term sales contracts, the selling price of PT Incos nickel-in-matte is determined by a
formula which is based upon the LME cash price for nickel. The following table shows PT Incos production, together with deliveries by Inco of finished
nickel refined from PT Incos matte, for the five years ended December 31, 2004: Production
    
    
    Deliveries ofof Nickel
    
    
    Finished NickelYear
    
    in Matte
    
    
    to Customers(1)(in tonnes)2000
    
    
    59,200
    
    
    
    60,1922001
    
    
    62,600
    
    
    
    61,0182002
    
    
    59,500
    
    
    
    61,9972003
    
    
    70,200
    
    
    
    65,5122004
    
    
    72,200
    
    
    
    73,853
   (1)
    
    Includes 12,064 tonnes in 2000, 12,283 tonnes in 2001, 12,557 tonnes in 2002, 14,307 tonnes
in 2003 and 14,716 tonnes in 2004 of nickel-in-matte delivered to SMM as a final product. As indicated in the tables on estimated ore reserves on a Company-wide basis above under
Ore Reserves and Mining Rights, PT Incos estimated ore reserves at the end of 2004 were 88
million tonnes of proven reserves grading 1.84 per cent nickel and 20 million tonnes of probable
reserves grading 1.81 per cent nickel compared with an estimated 62 million tonnes of proven
reserves grading 1.81 per cent nickel and 45 million tonnes of probable reserves grading 1.80 per
cent nickel at the end of 20037. In 1999, the Indonesian government passed legislation which had the effect of restricting open
pit mining and certain other activities in areas designated as protected forests. A significant
portion of the areas PT Inco is authorized to mine under its Contract of Work with the Indonesian
government would be protected forests under this legislation. After this legislation was
enacted, PT Inco and a number of other mining companies argued that this legislation should not
affect their rights to mine areas expressly authorized under their Contracts of Work. The
Indonesian government indicated that it would effectively exempt PT Inco and these other mining
companies from this legislation. An Indonesian government regulation was finally issued in March
2004 authorizing such an exemption and this regulation was confirmed by a law passed in July 2004
(the Exemption Law). An Indonesian presidential decree was issued in March 2004 which (i)
provided the exemption to PT Inco and certain other mining companies with respect to the
legislation passed in 1999 and (ii) vested the Indonesian Ministry of Forestry with the power to
issue regulations on activities conducted in protected forests. In the fall of 2004, this
Ministry issued regulations restricting mining in protected forests,   7
    
    Reference is made to Note (3) to the
tables entitled Total Estimated Ore Reserves as of December 31, 2004 and
Total Estimated Ore Reserves as of December 31, 2003 above for
the qualified persons under applicable Canadian securities regulatory
requirements who conducted, either directly by themselves or indirectly through
employees of the Company reporting directly or indirectly to them, a
comprehensive review and confirmation of the application of the detailed
procedures, systems and processes the Company has developed and implemented for
the purpose of verifying these estimated ore reserves. 37




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including requiring the receipt of licences and other approvals in order to conduct such
activities. In January 2005, certain parties initiated a process to have the legality of the
Exemption Law reviewed by the Indonesian constitutional court, a process that could result in a
decision whereby the 1999 legislation would apply to PT Inco and certain mining companies, and this
court is currently considering whether to proceed with such a review. While PT Inco continues to
believe that the terms of its Contract of Work provide it with all authorizations to conduct mining
activities in the areas covered by such contract and any disputes
relating to its Contract of Work are subject to arbitration under
international conventions, if the recently issued regulations and court
review referred to above restricted PT Incos ability to mine in certain areas, it could reduce PT
Incos estimated ore reserves and adversely affect PT Incos long-term mining plan. 
 Sales All of PT Incos production of nickel-in-matte is sold in U.S. dollars under long-term
contracts to Inco and SMM which, by their terms, continue until the expiration of the Contract of
Work. These contracts provide that if the Contract of Work is extended or renewed the contracts
will be extended for the period of such extension or renewal. Under these contracts, about 20 per
cent of PT Incos production is sold to SMM and the balance to Inco. PT Incos deliveries of nickel-in-matte were 72,500 tonnes in 2004, compared with 70,500
tonnes in 2003 and 61,900 tonnes in 2002. The Japanese nickel market continues to be particularly
important to PT Inco since PT Incos operations were conceived, in part, as a stable source of feed
material to Japanese nickel refiners in the form of a processed intermediate nickel product which
could be imported free of existing Japanese tariffs levied on refined nickel metal and other
finished forms of nickel. Inco owns a 67 per cent interest in ITL which processes nickel-in-matte from PT Inco to
produce finished products for the stainless steel industry in Japan. 
 Goro Nickel S.A. 
 Goro Deposit Goro Nickel holds a number of claims covering nickel-cobalt properties in New Caledonia,
located about 1,500 kilometres east of Australia. These properties have an extensive laterite
resource base, including, as reflected in the tables above covering estimated ore reserves on a
Company-wide basis under Ore Reserves and Mining Rights, an initial mining zone with, as of
December 31, 2004, an estimated 73 million tonnes of proven ore reserves grading 1.39 per cent
nickel and 0.13 per cent cobalt and 22 million tonnes of probable ore reserves grading 2.01 per
cent nickel and 0.09 per cent cobalt which has been outlined as an initial source of feed for a
commercial plant8. Given the completion of the comprehensive review of the Goro project
referred to below, the capital cost estimate used for this estimate of ore reserves as at year-end
2004 was based on the updated capital cost estimate announced in October 2004. This estimated ore
reserve base can be mined using low-cost open pit methods, which, when combined with Incos
proprietary pressure-acid leaching and solvent extraction (PAL-SX) technology, gives the project
the potential to have one of the lowest cash costs of nickel production in the world. 
 Ownership of Goro Nickel Inco
currently owns approximately a 90 per cent interest in Goro Nickel following the
capitalization of certain shareholder advances in late February 2005. On February 18, 2005, a company formed by the three provinces of New Caledonia, Société de
Participation Minière du Sud Calédonien SAS (SPMSC), acquired all of the shares of Goro Nickel
held by a subsidiary of Bureau des Recherches Géologiques et Minières (BRGM). These shares
represented, after the capitalization by Goro Nickel of certain shareholder advances as of February
18, 2005, approximately a 9.71 per cent interest in Goro Nickel. At the same time, Inco sold
shares in Goro Nickel to SPMSC representing approximately a 0.29 per cent interest such that SPMSC
would own, as of February 18, 2005, approximately a 10 per cent interest in Goro Nickel. SPMSC
also entered into a shareholders agreement with Inco on February 18, 2005 setting forth its rights
and obligations as a shareholder in Goro Nickel. Under the terms of that agreement, SPMSC will
have a right to nominate and elect one director to the board of directors of Goro Nickel so long as
it holds at least a five per cent interest in Goro Nickel. SPMSC   8
    
    Reference is made to Note (3) to the tables
entitled
Total Estimated Ore Reserves as of December 31, 2004 and
Total Estimated Ore Reserves as of December 31, 2003 above for
the qualified persons under applicable Canadian securities regulatory
requirements who conducted, either directly by themselves or indirectly through
employees of the Company reporting directly or indirectly to them, a
comprehensive review and confirmation of the application of the detailed
procedures, systems and processes the Company has developed and implemented for
the purpose of verifying these estimated ore reserves. 38




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will also have the right, but not the obligation, to make capital contributions on a pro rata
basis as required to meet the funding requirements of Goro Nickel until such time as the Goro
project meets certain minimum commercial production and related performance tests (the Threshold
Performance Tests). If SPMSC does not make such capital contributions, then Inco has agreed to
provide such capital contributions in addition to its own pro rata contributions, subject to
certain limitations, and SPMSC would, accordingly, suffer dilution of its ownership interest, with
the dilution formula to be subject to a penalty if SPMSCs interest by virtue of dilution were to
fall below five per cent. If the capital cost of the Goro project exceeds a threshold above the
current capital cost estimate prior to when the Threshold Performance Tests are met, then SPMSC
will not have any right or obligation to provide capital contributions to meet the Goro projects
funding requirements and Inco would be required to provide certain funding to meet such
requirements, up to a specified level, in the form of interest-bearing debt repayable by Goro
Nickel, and SPMSC would also be required to provide its pro rata share of certain administrative
and related costs incurred by Goro Nickel up to a specified limit. Once the Threshold Performance
Tests are met, to the extent that SPMSC has elected not to make its pro rata capital contributions
and, accordingly, has suffered dilution of its interest in Goro Nickel, SPMSC has agreed to
purchase from Inco, based upon the price paid by Inco for such shares plus interest thereon based
upon a formula tied to Incos then applicable long-term weighted average cost of capital, a
sufficient number of shares such that SPMSC will then hold a 10 per
cent interest in Goro Nickel. Our planned capital expenditures for
the Goro project do not assume that SPMSC will make its pro rata
capital contributions. SPMSC will also have the right to participate in any future expansion of the Goro project. In
the event that the Goro project were effectively abandoned on a permanent basis or did not meet the
Threshold Performance Tests within seven years after the Goro projects process plant had been
constructed and was ready to receive feed for processing, SPMSC would have the right to receive a
preferential payment ahead of Goro Nickels other shareholders out of the proceeds received from
the sale of Goro Nickels assets after the discharge of all of Goro Nickels liabilities to third
parties based upon SPMSCs total capital contributions in, and purchase of shares of, Goro Nickel
subject to a ceiling. Inco has agreed to provide, subject to certain terms and conditions, a
letter of credit in the future in favour of SPMSC to secure this preferential payment. 
 Goro Project In 1999, we completed the construction of an integrated pilot plant in New Caledonia
capable of processing 12 tonnes of ore per day to continue with the development of the PAL-SX
technology required for commercialization. The pilot plant operated successfully for over two
years, both in further proving the PAL-SX technology and in training the core workforce for a
future commercial plant. In April 2001, following completion of a bankable feasibility study, Inco announced that it
planned to proceed with the construction of a commercial nickel-cobalt project at Goro. During 2002, Inco proceeded with the commercial development of the Goro project. In early
September 2002, the project experienced labour disruptions by personnel associated with certain
project construction subcontractors. As a result of these disruptions, a decision was made to
curtail certain activities at the project site to enable Goro Nickel, contractors, subcontractors
and other interested parties to develop procedures to avoid future disruptions. Over the September
to November 2002 period, a number of procedures were put in place as part of a phased resumption of
certain of the project activities that had been curtailed. At the same time that the labour
disruptions referred to above occurred, Inco began updating the status of certain key aspects of
the project, including the necessary permitting, capital cost estimate, project schedule and
organization. Work on certain critical parts of the project, including engineering, continued
during this update process. 
 Project Review Process On December 5, 2002, Inco announced that it would be undertaking a comprehensive review
of all key aspects of the Goro project. This action was based upon information received by Inco
from the engineering, construction and procurement firms acting as the prime construction
contractors for the project which, if confirmed, indicated an increase in the capital cost
estimate for the project in the range of 30 to 45 per cent above the then current capital cost
estimate of $1,450 million. The objective of the comprehensive review was to assess all
information on the Goro project, including the various cost estimates and trends, and determine
what changes in the capital cost estimate and the project could be made to maintain the projects
economic feasibility. As a result of the temporary suspension of certain development activities
and other actions which had been taken by year-end 2002 during this review process, we recorded a
pre-tax charge of $25 million in the fourth quarter of 2002. This charge was comprised of pre-tax
expenses of $62 million relating to the cancellation or termination of certain outstanding
contractual obligations, to accrue for demobilization costs and to reduce the carrying value of
certain assets relating to the project, partially offset by currency gains of $37 million as a
result of the ineffectiveness of certain forward currency contracts that had been entered into for
hedging purposes. As part of the comprehensive 39




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review, we also evaluated various contractual and other arrangements covering construction and
other work relating to the Goro project and implemented certain actions to suspend or terminate
certain of those contractual arrangements. This review, as discussed above, evolved into two phases during 2003. Phase 1 of the review
focused on an orderly suspension of work and identification of opportunities for capital cost
reduction. In August 2003, we announced the key results of Phase 1 of the review process and that
we were moving to a second phase, or Phase 2, of the review which would involve a structured
process intended to (i) further develop the capital cost reduction opportunities identified in
Phase 1 and (ii) establish a capital cost control estimate, an updated project schedule and an
optimized and clearly defined scope and execution plan for the project. In late May 2004, we announced the key preliminary findings reached to that date as part of
Phase 2 of the review. These findings included (i) an updated preliminary capital costs estimate,
taking into account an expected non-cash charge, of approximately $1.85 billion for the mine,
process plant and related infrastructure, within a minus five per cent to plus 20 per cent
reliability range and (ii) in changes in the planned Goro project configuration, moving to direct
heating of the ore feed and other changes intended to reduce the capital cost estimate and enhance
the operating efficiency of the planned process plant and the process itself. As a result of such
changes, capitalized expenditures incurred of $201 million were written off as of the end of the
second quarter of 2004. These changes related to certain expenditures, principally
engineering and related work associated with the original project configuration and equipment
purchased for the indirect heating of ore feed, that no longer would have any value for the project or
otherwise. We announced the key final results of Phase 2 of the review in October 2004. These
final results included an updated capital cost estimate of $1.878 billion for the mine, process
plant and related infrastructure, within a minus five per cent to plus 15 per cent reliability
range. This estimate included about $40 million for assumed escalation in costs during the
construction phase of the project, an amount that was not in previous capital costs estimates, and
also reflected favourable currency hedging gains realized by Inco of about $31 million which were
also not included in previous estimates. The principal reasons for the increase from the $1.85
billion estimate which had been announced in May 2004 were higher costs for a range of construction
materials and labour required for construction and the incorporation of a new tailings storage area
as part of the project. The results of Phase 2 of the review also established an expected annual
capacity for the project of 60,000 tonnes of nickel and a current range for cobalt capacity of 4,300 to 5,000
tonnes per year to take into account the optimized mine plan for the project. Having completed and
achieved the key objectives of Phase 2 of the review, in October 2004 we also announced the
decision to proceed with the project. It is currently expected that the project execution will be
based upon a phased approach, with the first phase focusing on engineering, contract development
and permitting. Engineering work has progressed to date and fieldwork is currently expected to
commence in the second quarter of 2005. It is currently expected that the project will commence
production in the latter part of 2007. 
 Fiscal Regime The New Caledonian authorities enacted a fiscal regime in 2001 which provides a nominal
15-year tax holiday plus an additional five years at tax rates that are 50 per cent of the
prevailing tax rates for qualifying metallurgical companies. If the project achieves an internal
rate of return in excess of a cumulative threshold rate during this 20-year period, the applicable
tax rates or levels for the project would then be adjusted prospectively to be equivalent to the
general rates or levels then in effect for mining and processing companies. 
 Girardin Act Financing On December 30, 2004, we entered into agreements for the Goro project covering the
Girardin Acttax-advantaged lease financing program (Girardin Financing) sponsored by the French
Government. The Girardin Financing is subject to a ruling issued by the French Minister of
Economy, Finance and Industry (the Ruling). The Ruling provides that certain investors who are
French qualified investors under the Girardin Financing (Tax Investors) may utilize certain tax
deductions in connection with assets representing a portion of the Goro projects processing plant
which are financed by the Girardin Financing (Girardin Assets). The Ruling requires that Goro
Nickel and Inco satisfy certain conditions, including operating the Goro project for a minimum of
five years. As part of the Girardin Financing, a special purpose entity (SPE), a variable interest
entity, was formed by the Tax Investors to finance the purchase, construction and installation of
the Girardin Assets. As we are the primary beneficiary of the SPE, our consolidated accounts
include the accounts of the SPE. The purchase, construction and installation of the Girardin
Assets by the SPE is funded by a combination of (i) non-refundable loans (Tax Advances) provided
by the Tax Investors pursuant to a tax loan agreement (the Tax Loan Agreement) between the Tax
Investors and the SPE, and (ii) loans provided to the SPE by a subsidiary of Inco pursuant to a
loan agreement (the Loan Agreement). 40




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Under a construction agreement between the SPE and Goro (the Construction Agreement), Goro
has been appointed the construction agent on behalf of the SPE and is responsible for the purchase,
construction, installation and commissioning of the Girardin Assets. The costs for the
construction, installation and commissioning of the Girardin Assets total approximately $500
million and are payable in three instalments. In the event of a cost overrun, a fourth instalment
would be made to Goro Nickel with the additional funds provided pursuant to the Loan Agreement.
Goro Nickel is required to give notice of substantial completion of the Girardin Assets to the SPE
by December 31, 2008 or such later date as may be approved by the French tax authorities. Upon
such substantial completion, the SPE will lease the Girardin Assets to Goro Nickel under an
agreement between the SPE and Goro Nickel (the Lease Agreement). While the term of the Lease
Agreement is 12 years, the related agreements covering the Girardin Financing extend certain call
and put options to Goro Nickel and the SPE, respectively, covering both the Girardin Assets and the
ownership interests in the SPE whereby, assuming no default by Goro Nickel under the arrangements
covering the Girardin Financing, one of these options will be exercised after five years, resulting
in the termination of the Lease Agreement and the ownership of the Girardin Assets reverting to
Goro Nickel. The Construction Agreement and the Lease Agreement contain certain events of default and
termination rights for the benefit of the SPE, including the failure of Goro Nickel to meet certain
terms and conditions of the Ruling. Following any termination of the Lease Agreement, (1) certain
termination compensation could be payable by Goro Nickel to the Tax Investors pursuant to the
Add-Back Indemnity (as defined below) and (2) Goro Nickel would be required to either (a) repay the
entire then outstanding amount drawn under the Loan Agreement or (b) assume all of the SPEs
obligations under the Loan Agreement. Upon the occurrence of such events, Goro Nickel would
continue to have the right to use the Girardin Assets, with the SPE retaining ownership thereof
until all termination payments due by Goro Nickel under the Lease Agreement were paid. In
addition, each of the Lease Agreement and the Construction Agreement provides that Goro Nickel must
indemnify the SPE and the Tax Investors with respect to (1) the Add-Back Indemnity (as defined
below), (2) increased taxes incurred by the SPE or Tax Investors in respect of certain changes in
tax laws or the imposition of certain unanticipated taxes in New Caledonia and (3) certain
operational losses incurred by the SPE or Tax Investors arising out of third party claims in their
capacity as owners of the Girardin Assets. In the event of a termination of the Construction
Agreement or the Lease Agreement or in the event that the Tax Investors exercise their put option
upon the occurrence of certain material adverse environmental events relating to Goro Nickel prior
to the fifth anniversary of substantial completion of the Goro project, it is possible that the Tax
Investors could lose their tax deductions in respect of the Girardin Assets, thereby triggering an
indemnity whereby Goro Nickel would be required to reimburse the Tax Investors for the denial or
reversal of their tax deductions under the Girardin Financing by the French tax authorities and for
any interest and penalties levied thereon by such authorities (the Add-Back Indemnity). In
connection with any termination event, the Tax Investors will receive certain priorities relating
to Goros assets over other creditors. As at December 31, 2004, the Tax Investors had provided $41 million in Tax Advances which were
recorded on our balance sheet as a deferred credit since these advances represent government
assistance in the form of a forgivable loan. The SPE expects to receive the balance of the Tax
Advances in December 2005 and 2006 pursuant to the terms of the Tax Loan Agreement. It is
currently estimated that such Tax Advances will total $148 million, before fees to be paid to the
Tax Investors, with the balance of the Girardin Financing to be provided under the Loan Agreement.
Of the remaining Tax Advances to be made in 2005 and 2006, approximately 65 per cent of these
amounts have been committed by the Tax Investors, with the balance expected to be placed with
additional investors. In connection with the Girardin Financing, Inco Limited provided certain guarantees on behalf
of Goro Nickel covering payments due from Goro Nickel of up to a maximum amount of $100 million
(the Maximum Amount) in connection with the Add-Back Indemnity. Inco Limited also provided an
additional guarantee covering the payments due from Goro Nickel of (a) amounts exceeding the
Maximum Amount in connection with the Add-Back Indemnity and (b) certain other amounts payable by
Goro Nickel under the Girardin Financing relating to certain possible operational or other
developments applicable to the Goro project. 
 New Caledonia New Caledonia is currently an overseas territorial community (collectivité territoriale)
of France having special legal status under the French constitution, including significant autonomy
except in foreign relations, defence, justice, currency and certain other related areas. As part
of the objective of increasing New Caledonias autonomy from France and to implement arrangements
to address political and other issues that New Caledonia had experienced, in 1998 the French
government, the New Caledonian government and two New Caledonian political movements representing
the native population entered into the Noumea accord. This accord sets forth a process and
timetable for increasing the autonomy of New Caledonia over the coming years, culminating in a
referendum to be held by 2018 on whether New Caledonia would become fully independent from France.
As part of the initial phase of the accord, steps have been taken, and will be taken over the next
few years, to develop the form of provincial governments to be part of the New 41




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Caledonian government structure and to pass local legislation, including the enactment of a
new mining law, that will provide for the transfer of certain authority in a number of areas still
maintained by France to the New Caledonian government. We do not believe that these developments
will have an adverse effect on the Goro project but there can be no assurances in this regard.
Provincial elections were held in May 2004 for the election of members of the three provincial
assemblies in New Caledonia. Each assembly will elect its president who will be part of the
provinces executive board. The members of the newly elected provincial assemblies will also serve
as members of the Congress of New Caledonia. This Congress is responsible for the selection of the
President of New Caledonia. 
 Prony West Deposit In September 2001, Goro Nickel applied for an exploration permit for an area next to the
Goro deposit known as Prony West. Several other companies applied for the same exploration permit.
After an assessment of the various applications, the government of the South Province of New
Caledonia determined that Goro Nickels application was the best technically and offered the
greatest financial commitment. The South Provinces recommendation to accept Goro Nickels
application was discussed at a government mining committee (Comité Consultatif des Mines) level in
April 2002 and the recommendation to accept Goro Nickels application was subsequently approved by
the provincial mining council (Conseil des Mines). In July 2002, after a public debate on the
awarding of this exploration permit, the legislative assembly of the South Province voted to award
the Prony West exploration permit to Goro Nickel. As soon as this decision was made, several
companies challenged the South Provinces decision. The administrative tribunal which considered
this challenge released its decision on December 24, 2003. The administrative tribunal decided
that the legislative assembly of the South Province did not have the authority to make the award as
this authority had been previously delegated to the Executive Committee of the South Province and
that the delegation had not been withdrawn. As a result of this decision, the exploration permit
previously awarded to Goro Nickel was cancelled. However, after the cancellation of this permit,
on December 27, 2003, the Executive Committee of the South Province met and re-awarded the
exploration permit to Goro Nickel. This decision to re-award the permit to Goro Nickel was open to
challenges until late April 2004. A number of challenges were
filed by several different parties and those challenges are currently being reviewed by the relevant governmental bodies. We cannot currently predict what effect, if any, that these challenges could have on the December 2003 re-award. 
 Voiseys Bay Nickel Company Limited 
 Voiseys Bay Deposits The Voiseys Bay deposits consist of four main mineral deposits: the Ovoid, the Eastern
Deeps and related deposits, the Reid Brook deposit and the Discovery Hill deposit. As of December
31, 2004, as reflected in the table Total Estimated Ore Reserves as of December 31, 2004 under
Ore Reserve and Mining Rights above, proven ore reserves of 29 million tonnes grading 3.05 per
cent nickel, 1.77 per cent copper and 0.15 per cent cobalt and probable ore reserves of three
million tonnes grading 0.76 per cent nickel, 0.45 per cent copper and 0.04 per cent cobalt were
estimated for the Ovoid. Reference is made to the notes to such table for information on how these
reserves were estimated and how Inco meets certain Canadian securities regulatory requirements for
the purpose of any ore reserve estimates it might prepare. VBNCs exploration expenditures in Labrador were $3 million in 2004, compared with $2 million
in 2003 and $0.2 million in 2002. In 2004, in-fill exploration drilling from surface was carried
out at the Reid Brook, Discovery Hill and Eastern Deeps deposits. At Reid Brook, 24 holes
totalling 9,800 metres were drilled in 2004, resulting in the addition of high-grade massive
sulphide mineralization to this deposit. Massive sulphides occur primarily as flat-lying bands and
lenses within the wall rocks adjacent to the troctolite dyke that hosts much of the mineralization
and we currently believe that there is potential to add additional massive sulphide mineralization
to this deposit with further drilling. A total of 11 holes were drilled at the Discovery Hill
deposit in 2004. This drilling added additional mineralized material to the deposit. Geotechnical
data were collected and core specimens were examined to determine their mineralization. The
resource block model was updated and a scoping-stage feasibility assessment was completed based on
the sub-level cave mining method. Two boreholes were drilled at the Eastern Deeps deposit to test
the variability of the massive sulphide contacts. The drilling confirmed the interpretation of the
massive sulphide. Geophysical surveys, exploration drilling and feasibility assessments will
continue on these zones in 2005. 
 Environmental Review Process The scope of the environmental review and approval process for the Voiseys Bay project
was established under a January 1997 memorandum of understanding among the Governments of Canada
and the Province of Newfoundland and Labrador (the Province), the LIA and Innu Nation on a
harmonized environmental review process for the mine, concentrator and related facilities and
infrastructure in the Voiseys Bay area (the Mine/Concentrator Project). 42




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Having undergone a comprehensive environmental review, both the federal and provincial
governments released the Mine/Concentrator Project from the environmental assessment process
subject to certain terms and conditions, including measures intended to mitigate potential
environmental effects relating to the Mine/Concentrator Project, and accepted a number of the
panels recommendations. We do not believe that those recommendations or the terms and conditions
of the releases stipulated by the governments will create any unduly burdensome financial or other
restrictions on the Mine/Concentrator Project. In 1999, the federal and provincial governments entered into negotiations with the LIA and
Innu Nation to develop a project-specific environmental management agreement for the issuance of
the necessary governmental licences and permits for the Mine/Concentrator Project. With the
agreement on the commercial development of the Voiseys Bay project having been reached in
mid-2002, as discussed below, these discussions restarted and in July 2002 the governments entered
into an environmental management agreement with the LIA and Innu Nation which created an
environmental management board in order to provide for participation by these aboriginal groups in
the process leading to the issuance of the necessary licences and permits for the Mine/Concentrator
Project. The environmental management board has been meeting since it was created in July 2002 to
address the issuance of the necessary permits and licences for the Mine/Concentrator Project,
including the mining and surface leases issued to VBNC pursuant to the definitive agreements
entered into with the Province of Newfoundland and Labrador, as discussed below. Over 100 permits
were issued in 2003 and a further 125 permits were issued in 2004 for the construction and
operation of the Mine/Concentrator Project, and 22 permits were issued in 2004 for the construction
of the hydrometallurgical demonstration plant at Argentia. In early September 1999, separate court actions were filed in the Canadian federal courts by
the LIA and Innu Nation asserting that the federal government should have imposed additional
conditions to, and did not meet certain consultative and other requirements in arriving at, its
decision to release the Mine/Concentrator Project from the environmental assessment process. These
actions were stayed pending the outcome of the ongoing negotiations of separate impacts and
benefits agreements (IBAs) with the LIA and Innu Nation and in the summer of 2002 both of these
court actions were discontinued as conditions to the effectiveness of the IBAs that VBNC entered
into with the two aboriginal groups, as discussed below. In addition, in mid-October 1999 another
aboriginal group, the Nunavik Inuit, filed an action against a federal minister in the Canadian
federal courts, asserting that its rights had not been properly considered or protected in land
claims negotiations and the agreement in principle on land claims reached in May 1999 between the
federal government and the LIA. This dispute was settled and the action was discontinued by the
Nunavik Inuit. With respect to the demonstration plant as part of the Voiseys Bay project, during 2004 we
obtained all of the necessary environmental and other permits to begin construction of that
facility and expect to receive all of the required remaining permits on a timely basis in
conjunction with the start-up of that facility in 2005. In 2004, we also began the process
covering the environmental assessment review of the planned commercial processing plant to process
nickel concentrates from the Voiseys Bay mine and concentrator. This review process is
anticipated to be a multi-year one and is expected to be completed in 2007. 
 Negotiations with Aboriginal Groups In June 2001, when confidential negotiations with the Province restarted on the terms
that would enable the project to proceed, VBNC also resumed separate IBA negotiations with the LIA
and Innu Nation. VBNC reached agreement on IBAs with both the LIA and Innu Nation in May 2002.
These IBAs were subsequently ratified by the respective memberships of the two aboriginal groups
and were signed by the parties effective July 29, 2002. The IBAs set forth (i) certain payments to
be made to the LIA and Innu Nation by Inco and VBNC over the life of the Voiseys Bay project, (ii)
programs relating to training, employment and business opportunities for the LIA and Innu Nation
and (iii) the participation of the LIA and Innu Nation in environmental and certain other programs
and procedures relating to the operation of the Mine/Concentrator Project, among other things. We understand that, following separate confidential negotiations between each of the LIA and
Innu Nation and the Governments of Canada and the Province of Newfoundland and Labrador, interim
agreements were reached to resolve the respective land claims of the LIA and Innu Nation in July
2002. Neither VBNC nor Inco was a party to these agreements nor to the negotiations leading to
those agreements. The LIA has since reached agreement with the federal and provincial governments
on how their claims relating to Voiseys Bay would be addressed in its final land claims agreement,
as well as an interim measures agreement to allow the Mine/Concentrator Project to proceed. We
understand that the federal and provincial governments and the LIA reached agreement on a final
comprehensive land claims agreement in August 2003 and that in early 2004 the LIA completed a
community-based ratification process ratifying the final comprehensive land claims agreement among
those parties. The Province passed legislation ratifying the land claims agreement in December
2004 and the federal government is expected to ratify that agreement in 2005. 43




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Innu Nation had indicated in January 1999 that it was evaluating the alternatives available to
it in pursuing its land claims. In the fall of 2000, Innu Nation and the federal government began
negotiating the registration of the Innu people of Labrador to become eligible for benefits under
the Indian Act(Canada). Innu Nation has also reached agreement with the federal and provincial
governments on how their claims relating to Voiseys Bay would be addressed in its final land
claims agreement, and entered into a memorandum of agreement under which Innu Nation agreed, among
other things, not to assert any aboriginal land claims in the Voiseys Bay area, thereby allowing
the Mine/Concentrator Project to proceed. We have been advised that the Innu of Labrador were
registered for eligibility under the Indian Actin November 2002, and that a reserve was created
for the community of Natuashish in December 2003, but the community of Sheshatshiu does not yet
have reserve status. We also understand that the federal and provincial governments and Innu
Nation in 2003 and 2004 continued negotiations towards the conclusion of a final comprehensive land
claims agreement, but no such agreement has as yet been reached. 
 Negotiations with the Provincial Government In mid-1998, following confidential discussions with the Government of Newfoundland and
Labrador, Inco and VBNC proposed to provincial officials an initial Mine/Concentrator Project to
produce intermediate concentrate from the Voiseys Bay deposit, with the concentrate to be further
processed at Incos existing processing facilities in Ontario and Manitoba, where there will be
excess capacity. As part of this initial phase of the project, Inco proposed to carry out an
extensive underground exploration program to determine the economic feasibility of the underground
deposits at Voiseys Bay. Our proposal also included the development, if and when economic, of
additional processing facilities in the Province. This approach is similar to the approach used
successfully in Sudbury and other nickel locations where facilities have been developed in stages
as additional ore reserves have been proved. In July 1998, the Province turned down this proposal
and suspended negotiations with Inco. Over the last half of 1999, Inco engaged in discussions with the provincial government on a
revised project framework for development of the Voiseys Bay deposit. These negotiations did not
result in an agreement as the Province insisted that we provide an unconditional guarantee that
processing facilities would be built in the Province, even if they were not economic. No further
negotiations were held until June 2001, when we resumed confidential negotiations with
representatives of the Province concerning the terms of an agreement on the commercial development
of the Voiseys Bay deposit. These negotiations continued in the first half of 2002 and on June
11, 2002 Inco and the Government of Newfoundland and Labrador announced their agreement on a
non-binding statement of principles covering the development of the Voiseys Bay project. The
statement of principles was approved by the provincial legislature in late June 2002 and on October
7, 2002 Inco and VBNC signed definitive agreements with the government to implement the terms of
the statement of principles. The definitive agreements provide for the development of a mine and
concentrator processing plant at Voiseys Bay, representing the Mine/Concentrator Project, a
research and development program focusing on hydrometallurgical processing technologies, an
industrial and employment benefits program for the Voiseys Bay project, a timetable for the start
and completion of the principal stages of the project, and other key parts and requirements
covering the overall development of the Voiseys Bay project. The definitive agreements set forth
certain obligations of Inco to construct and operate (i) a demonstration plant in the Province as
part of the overall research and development program to test hydrometallurgical processing
technologies to treat nickel-containing ores or intermediate products from the Voiseys Bay
deposits and (ii) subject to technical and economic feasibility pursuant to the terms thereof, a
commercial processing facility in the Province by the end of 2011 to treat all of the Voiseys Bay
ores or intermediate products to produce finished nickel and cobalt products based upon
hydrometallurgical processing technologies or, if such technologies do not meet certain technical
and/or economic feasibility requirements, as may be determined by one or more agreed upon experts
as provided for in such agreements, a conventional refinery. Once the demonstration plant is
completed and has received intermediate concentrate product from the Mine/Concentrator Project for
testing, Inco can ship quantities of intermediate concentrate products produced by the
Mine/Concentrator Project containing nickel and/or cobalt to Incos facilities in Ontario and
Manitoba for further processing into finished nickel and cobalt products. Shipments of such
Voiseys Bay intermediate concentrates are limited to certain maximum aggregate quantities and will
end when the construction of the hydrometallurgical or conventional matte commercial processing
facility, as the case may be, is completed. Under the definitive agreements, Inco is also required, prior to the cessation of the Voiseys
Bay mining operations in the Province, subject to certain exceptions relating to the availability
of such external sources, to bring into the Province for further processing at the
hydrometallurgical or conventional matte processing facility to be constructed in the Province from
sources outside the Province, in one or more intermediate forms, quantities of intermediate
products, subject to certain annual minimum quantities, containing in total quantities of nickel
and cobalt equivalent to what was shipped to our Ontario and Manitoba operations. The definitive
agreements also set forth (1) Incos commitment to an underground exploration program covering the
Voiseys Bay deposits with the objective of discovering sufficient nickel-containing ore reserves
for processing beyond the initial phase of the Voiseys Bay project, (2) the terms under which the
processing of copper intermediate in the Province would be justified, and (3) the Provinces
commitment to (i) the tax regime that will apply to the project, (ii) electric power rates for the
project and (iii) the issuance of the 44




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necessary permits and authorization to enable the Voiseys Bay project to proceed. The
definitive agreements also provide for programs and arrangements relating to employment and
industrial benefits in connection with the construction and related aspects of the project. The
definitive agreements also include specific sanctions if Inco were not to meet certain of its
contractual obligations under such agreements, including the effective forfeiture of its lease to
conduct mining operations in the Province. Under the terms of the definitive agreements, certain
provisions became effective when these agreements were executed. The next steps which were to be
met by the end of the first quarter of 2003 for these agreements to become effective overall
include the securing of acceptable financing arrangements for the project and completing a bankable
feasibility study for the first phase of the project, including the Mine/Concentrator Project. As
discussed under Project Phases below, the bankable feasibility study was completed in late March
2003. In March 2003, Inco advised the Province that it was waiving the financing condition in
these agreements. The remaining conditions to the effectiveness of these agreements were met in
the third quarter of 2003. 
 Project Phases Inco announced in late March 2003 (i) the results of a bankable feasibility study for the
mine and concentrator for the Ovoid and adjacent surface deposits and related facilities
representing part of the initial phase of the Voiseys Bay project and (ii) that it planned to
proceed with this initial phase. The initial phase of the Voiseys Bay project consists of (i)
the Mine/Concentrator Project and related infrastructure, (ii) a research and development program
covering hydrometallurgical processing technologies (the Hydromet R&D Program) for the treatment
of the Voiseys Bay nickel and cobalt-containing concentrates to be produced into finished nickel
and cobalt product, including a demonstration plant to be constructed in Argentia, Newfoundland,
(iii) concentrate handling facilities to be constructed at our Canadian operations for the nickel
and cobalt-containing concentrates to be processed over the 2006-2011 period once the
Mine/Concentrator Project is completed and (iv) an exploration program. As at December 31, 2004 we
estimate that this initial phase will cost $920 million and as of the end of 2004 we had incurred
expenditures of approximately $620 million on this initial phase. The project completion date for the initial phase, as described above, was in 2004 advanced by
six months from the original schedule established, with the first shipment of concentrate currently
planned for November 2005 and initial finished production from Voiseys Bay in early 2006.
Assuming technical and economic success, a commercial hydrometallurgical processing plant will be
built as part of the second phase of the project between 2009 and 2011. As noted above, in the
unlikely event that the hydrometallurgical process proves not to be technically and/or economically
feasible, a conventional refinery will be built to produce finished nickel product. It is expected
that the Voiseys Bay hydrometallurgical plant will produce approximately 50,000 tonnes of nickel,
2,300 tonnes of cobalt, up to 7,000 tonnes of copper intermediates, and 32,000 tonnes of copper
concentrate annually. A total investment, based upon the updated capital cost estimate for the
initial phase and the prefeasibility studies for the other two phases of the project, of
approximately $2,000 million would be required for all phases of the project over the 30-year life
of the project, including estimated sustaining capital. 
 2002 Asset Impairment Charge In June 2002, Inco announced that it would be undertaking a review of the net carrying
value of the Voiseys Bay project in view of the statement of principles entered into with the
Government of the Province of Newfoundland and Labrador on that date and other arrangements with
key stakeholders that would enable the development of the Voiseys Bay project to proceed. Inco
had previously noted on a number of occasions in its public filings and other documents that such
events, if and when they were to occur, might require a significant reduction in the carrying value
of the Voiseys Bay project and in the related deferred income and mining tax liability and in
shareholders equity. This review, which was completed in July 2002, included an analysis of the
key assumptions which we utilized in evaluating this net carrying value on a quarter-to-quarter
basis relating to a number of important factors, including our best assessment of the expected cash
flows from the project, how the development of the Voiseys Bay project, taking into account the
agreements which have been reached, fits within our overall long-term development plans and updated
mining and other cost assumptions. As a result of this review, we recorded a non-cash charge of
$1,552 million, net of deferred income and mining taxes of $770 million, in the second quarter of
2002 to reduce the $3,753 million net carrying value of the Voiseys Bay project to $2,201 million.
In 2000, as a result of a change in Canadian GAAP, the deferred income and mining tax liability
associated with Voiseys Bay was increased by $2,222 million and the carrying value of Voiseys Bay
was also increased by this same amount. 
 Exploration and Mine Development One of the objectives of Incos exploration program is to provide us with sufficient ore
reserves to sustain production at current levels for at least 20 years at its Ontario and Manitoba
operations. See Mining and Production  General above for further 45




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information on our planned production levels and Ore Reserves and Mining Rights in Canada
above for information on our estimated proven and probable ore reserves. We also continue to
pursue exploration opportunities for precious metals (PGMs and gold) in Ontario. Exploration expense totalled $32 million in 2004, compared with $27 million in 2003 and $24
million in 2002. Exploration efforts continue to focus on finding additional high-grade nickel
deposits in Canada near existing mine workings to expand our estimated ore reserves and provide
additional feed for our existing processing facilities. Of our total exploration expenditures in
2004, $13 million was spent on exploration in Ontario and Manitoba directed at finding additional
nickel, copper and PGMs ore reserves near our existing mines, compared with $11 million in 2003 and
$9 million in 2002. Additions in 2004 to estimated ore reserves from the evaluation of diamond
drilling in 2004 totalled four million tonnes averaging 1.4 per cent nickel and 1.0 per cent copper
at our Ontario operations. We have also continued to evaluate non-nickel exploration targets and
joint venture opportunities that have the potential to enhance our overall mining operations. At our Ontario operations, underground exploration continued in 2004 on the 170 footwall
high-grade precious metals deposit at McCreedy/Coleman Mine. Additional holes were drilled from
the exploration drift. The hanging wall exploration drift, which is required to conduct the
close-spaced drilling for final feasibility assessment, was collared and had advanced 120 metres by
the end of January 2005. In-fill drilling is currently scheduled to begin in April 2005. As of
December 31, 2004, the probable ore reserves in the 170 deposit were estimated at 1.5 million
tonnes grading 1.0 per cent nickel, 7.4 per cent copper and 14.5 grams/tonne combined platinum,
palladium and gold. Exploration drilling was conducted at McCreedy/Coleman Mine on the down-dip
extension of the 153 footwall high-grade precious metals deposit. The 153 orebody is currently
being mined and proven and probable ore reserves were estimated at 3.1 million tonnes grading 1.2
per cent nickel, 12.1 per cent copper and 12.2 grams/tonne combined platinum, palladium and gold at
year-end 2004. The drilling results have been encouraging and resource evaluation and mine
planning will be carried out in 2005. At Copper Cliff North Mine, the deteriorating ground conditions problem that had been
encountered in 2003 was resolved and production from the high-grade precious metals zone of the 130
orebody was achieved in 2004, helping to increase Incos total
PGMs production to 422,000 troy
ounces in 2004. Production from this area is continuing in 2005. Infill exploration drilling was
conducted on the 191 nickel-copper-precious metals orebody to upgrade the ore reserve estimate from
the probable to the proven category for full feasibility assessment. Additional drillholes
intersected the 191 footwall zone and the economic potential of this zone is currently being
evaluated in conjunction with the main 191 orebody. Exploration drilling was also carried out in
the 178 nickel-copper-precious deposit located approximately 500 metres south of the 191 orebody
toward the Copper Cliff North Mine production shaft. The results of the drilling and down-hole
geophysical surveys indicate that further exploration is warranted in 2005. A scoping level
engineering study is to be completed on the 178 deposit in 2005 to assess the economic potential
and plan further exploration. Exploration drifting on the 3,400-foot level of Copper Cliff North
Mine was completed in 2004 and exploration drilling began on the down-dip extension of the
high-grade precious metals zone of the 138 orebody. Ore grade mineralization has been intersected
and exploration is to continue in 2005. Exploration at Copper Cliff South Mine was carried out in 2004 to extend the estimated ore
reserves in the 865 orebody below the 2,400-foot level. Drilling on the southern end of the 865
orebody identified a major new mineralized zone which is referred to
as the 863 nickel-copper-PGMs
deposit, located approximately 500 metres south of the 865 orebody, within the quartz diorite dyke
which hosts the ore deposits at the Copper Cliff North and Copper Cliff South mines. Several
intersections of massive sulphide mineralization were encountered containing high-grade copper and
nickel over widths ranging from five to 50 metres over a plunge length of 400 metres to the
4,800-foot level of the mine. Additional drilling and geological and other assessments are planned
in 2005 on the 863 nickel-copper-PGMs deposit. The physical connection between Copper Cliff North and Copper Cliff South mines was completed
in 2004. Some equipment and services are now being shared by the two mines and the connection
provides Copper Cliff North Mine with ramp access to the surface through Copper Cliff South Mine. A
drift was also driven on the 2,800-foot level of Copper Cliff North Mine to mine a portion of that
mines 880 orebody. The Cdn.$33 million Phase 2 project to develop a high-grade nickel deposit at McCreedy/Coleman
Mine, which was announced in 2000, reached an average production rate of 1,160 tonnes of ore per
day in 2004, and is expected to reach its design capacity of 1,635 tonnes per day in 2005,
increasing the level of production from McCreedy/Coleman Mine by over 60 per cent from 2002
production levels. The Cdn.$39.6 million Phase 3 project to develop a section of McCreedy
East/Coleman Mines main orebody, which was announced in 2003, was about 55 per cent complete by
year-end 2004. Production of ore from this project began on schedule in December 2004. A haulage
ramp was extended to the 4,300-foot level and development of the 4,215-foot level connecting the
west 46




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orebody and the main orebody continued as planned and was 60 per cent complete by year-end
2004. The west orebody down-ramp was extended to the 4,300-foot level. When this project is
complete, it is expected to supplement production from McCreedy/Coleman Mine by an additional 1,070
tonnes of ore per day. In 2004, Incos surface exploration program continued to test and evaluate both mine
extensions and new exploration targets in the South Range, North Range and East Range of the
Sudbury Basin and in the Copper Cliff and Worthington offsets in this basin. At the Copper Cliff
offset, a surface drilling program which began in 2003 continued to test the Pump Lake 205 zone
below the 4,000-foot level between our Copper Cliff North and Murray mines. The results from this
program indicate that copper-nickel-precious metals mineralization continues at depth. This
program also helped to further define the continuity and grade distribution of the Pump Lake 205
zone. In the South Range of the Sudbury Basin, an advanced exploration program was initiated at
the Blezard deposit located northeast of the Ontario operations Stobie Mine to sample and assess
precious metals mineralization, confirm tonnage and grade continuity, and obtain material for
metallurgical testing. As a result of this exploration, a probable reserve of 3.4 million tonnes
grading 0.97 per cent copper, 1.41 per cent nickel, 0.05 per cent cobalt, 0.45 grams/tonne
platinum, 0.34 grams/tonne palladium and 0.07 grams/tonne gold was estimated as of year-end 2004.
Advanced exploration programs were also carried out at Creighton Mine to test for extensions of the
402 orebody up-plunge along a trend to Gertrude Mine above the 3,500-foot level. At Garson Mine,
drilling was conducted on the 600 deposit near the surface to confirm the grade continuity and
tonnage. The results were encouraging and economic assessments will be conducted in 2005. In the
Worthington offset, exploration at Totten Mine identified a potential extension to the main zone
along strike to the south. In the East Range of the Sudbury Basin, exploration continued at the
Victor project where a limited surface drilling program focused on testing footwall mineralization
potential and gaps in drilling and geophysical survey coverage above the 6,500-foot level. Further
feasibility assessments will be conducted in 2005. In the North Range of the Sudbury Basin, a
brownfield exploration program was initiated to test a significant gap in diamond drilling along
the Sudbury igneous complex contact in Norman Township. This program is scheduled to continue in
2005. In October 2000, a decision was made to proceed with a $12 million project to develop the
lower-grade area of Stobie Mine at our Ontario operations. The development and construction needed
for production to begin through the ore-handling component of this project was completed in late
2001. Ongoing lateral development and construction of the individual mining levels continued in
2004. Production from this project reached 4,605 tonnes per day in 2004. This level was below the
planned level of 5,900 tonnes per day which was due to a number of technical difficulties. The
planned production level for 2005 is 4,925 tonnes per day. The current plan is to operate the new
ore-handling system as part of this project beyond 2006. In 2004, mine development continued on the first of the expected two phases of the Creighton
Deep project at the Ontario operations Creighton Mine, a project that was originally announced in
1998. Capital expenditures on this project totalled Cdn.$5.3 million in 2004. The development of
a second production level (at the 7,680-foot level) as part of the first phase began in early 2003
and the first phase of the project is scheduled for completion in 2006. Production from the first
phase totalled 223,385 tonnes of ore grading 2.97 per cent nickel and 2.08 per cent copper in 2004
and production is expected to continue at a rate of approximately 280,000 tonnes of ore per year
until 2016. We are currently evaluating the second phase of this project, to access the down-dip
extension of this orebody. The probable ore reserve that would be accessed in the second phase of
the Creighton Deep project is estimated at 5.0 million tonnes grading 3.0 per cent nickel and 3.3
per cent copper between the 7,680-foot level and the 8,220-foot level of Creighton Mine. As of the end of 2004, the Cdn.$67 million project to deepen Garson Mine from the 4,470-foot
level to the 5,070-foot level was about 95 per cent complete. The ventilation shaft from surface
to the 3,400-foot level was completed and the new mine ventilation system was completed and
commissioned. The main haulage ramp was extended to below the 5,000-foot level and the lateral
development of that level of the mine was begun. The project is approximately four months behind
schedule, due mainly to the impact of the three-month strike at our Ontario operations in 2003.
However, production rates from Garson Mine had reached the project design rates of 2,087 tonnes of
ore per day by the end of 2004. This project is expected to extend the life of Garson Mine until
approximately 2012. In January 2002, Inco entered into an option agreement with FNX Mining Company Inc. (FNX)
relating to certain rights extended to FNX to explore and develop five non-core properties of the
Company in the Sudbury basin. The properties covered by this agreement all have a history of past
production but were inactive and Inco had no further plans for the exploration or development of
these properties. Subject to meeting certain conditions enabling it to exercise the option to
acquire a 100 per cent interest in the mineral rights to these properties, FNX agreed, pursuant to
the terms of the option agreement, to spend Cdn.$14 million over a 16-month period beginning in
January 2002 and was granted an option to earn a 100 per cent interest in the mineral rights in
these properties by spending a further Cdn.$16 million over the next four years. In December 2003,
FNX announced that it had completed its total expenditure commitment and had exercised its option
to acquire a 100 per cent interest in the mineral rights covering the 47




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properties. As part of the agreement, Inco had initially acquired common shares and common
share purchase warrants of FNX representing a total equity interest in FNX of 19.9 per cent on a
fully-diluted basis. However, our ownership position declined to about 12 per cent as of year-end
2002 due to the issuance of additional shares by FNX and the sale of FNX shares by Inco. We
completed the sale of our shares in FNX in May 2003. Under the terms of a related offtake
agreement, Inco also has the right, but not the obligation, to purchase and refine all of the ore
production from the properties covered by the option agreement. During 2004, exploration,
consisting of surface and underground diamond drilling, ground geophysics, mapping and prospecting,
was carried out on the properties covered by the option agreement. In addition FNXs partner,
Dynatec Corporation, continued advanced underground exploration, development and mining at one of
the properties and commenced advanced exploration and underground development at two other
properties. FNX is currently shipping ore to Inco from the McCreedy West property under the
offtake agreement. In January 2005, Inco entered into a joint venture agreement with Lonmin Plc and its
subsidiary Lonmin Canada Inc. (Lonmin) to establish a 50:50 unincorporated joint venture over six
of our properties in the Sudbury basin. The purpose of this venture is to explore for, and
subsequently develop and process, low sulphide PGMs-rich deposits occurring away from the typical
high-grade base metals deposits in the Sudbury Basin. Lonmin has committed to solely fund a
minimum expenditure of $10 million over the first three years of the venture and, subsequently, at
Lonmins annual election, to spend a minimum of $3 million per year. After Lonmin has solely
funded expenditures of $32 million in total, Inco and Lonmin will fund the venture on a 50:50
basis. Lonmins interest in any PGMs deposits discovered based upon work undertaken by the venture
on the properties covered by the venture does not vest until a development decision is made in
respect of the relevant deposit. Inco retains 100 per cent ownership of all non-PGMs mineral
deposits on the properties covered by the venture. The venture will also pay to Inco a three per
cent net smelter royalty on all product sourced from the ventures PGMs deposits. In the Thompson, Manitoba nickel belt, the compilation of exploration targets for the regional
surface exploration program on the OIC Leases continued in 2004 and is scheduled to continue in
2005, but no field work was conducted in 2004 and none is currently planned for 2005. Underground
exploration continued in 2004 at both the Thompson and Birchtree mines at our Manitoba operations
to test for extensions to known deposits and to identify new satellite deposits. An advanced exploration program continued on the Thompson 1D lower orebody at our Manitoba
operations located below the 3,600-foot level of Thompson Mine. Drilling in 2004 provided
more detail on the shape of the deposit and the distribution of the ore grades. Initial ore from
this orebody was accessed during the first quarter of 2004. In addition, an assessment of the
150-metre long southern extension of the 1-D lower orebody and 6,861 metres of diamond drilling
were completed in 2004, extending the 1-D lower orebody by 150 metres to the south. No further
drilling is currently planned for this area and the results of this work are currently being
assessed. At the north end of the 1D lower orebody, five holes totalling 1,725 metres were
drilled, confirming the continuity of high-grade nickel mineralization down-dip and down-plunge to
the north. These drilling results, combined with an economic analysis, justified the commencement
of advanced exploration in this area. Approximately 170 metres of development was completed in
this area in 2004 and 500 metres of development and exploration drilling are planned for 2005. At
the 2,400-foot level of Thompson Mine, a total of 2,906 metres of diamond drilling was completed in
2004 to determine the continuity and thickness of nickel sulphide in this area of the Thompson 1D
orebody. The results justified the continuation of this program and the rehabilitation of the
1,600-foot level of the mine was completed in preparation for diamond drilling in 2005. A
2,036-metre surface diamond drilling program was also completed immediately north of the T-3 shaft
of Thompson Mine to assess the potential for a small open pit mine. Given these initial results,
further work in this area and overburden drilling and diamond drilling are planned for 2005. As discussed under Mining and Production  General above, our Manitoba operations have been
transitioning from the high-grade Thompson Mine, the principal source of ore for these operations,
to the lower-grade Birchtree Mine. In 2004, the two-year Cdn.$71 million project to deepen
Birchtree Mine was completed. This project is expected to extend the life of Birchtree Mine by at
least 15 years. In 2004, we continued our drilling program at Birchtree Mine to test the down-dip
extension of the mines 108 zone above the 3,450-foot level. A ramp from this level was completed,
facilitating 5,542 metres of diamond drilling. Diamond drilling was completed to test the 109 zone
between the 3,450-foot level and the 4,200-foot level. A six-hole, 1,616-metre drilling program
from the 4,050-foot level confirmed the potential for down-dip extensions of Birchtree Mine below
the 4,000-foot level. Additional drilling is planned for this area in 2005. Exploration continued during 2004 at the Mel project, located 25 kilometres north of the City
of Thompson, under the terms of an agreement with Nuinsco Resources Limited (Nuinsco) entered
into in August 1999. The agreement grants Nuinsco the right to acquire the mineral lease that
covers the Mel deposit and 60 contiguous mining claims by incurring total expenditures of Cdn.$6
million by February 2006, subject to Incos right to buy back a 51 per cent interest in the deposit
by spending the next Cdn.$6 million over a further four-year period. Under the terms of this
agreement, all production from any commercial quantities of ore discovered would be delivered to
our Thompson facilities for processing on then prevailing market terms. During 2004, Nuinsco 48




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funded a program of surface electromagnetic (UTEM) surveys, diamond drilling and borehole UTEM
surveys on the Mel mineral lease and mining claims. A total of 10 surface UTEM grids, 5,174 metres
of diamond drilling and one borehole UTEM survey were completed. Massive sulphide was intersected
on the mining claims but no significant nickel mineralization was found. The Mel deposit was also
updated and a scoping study was initiated to consider an open-pit mining approach for the deposit.
Several surface UTEM conductors that are associated with one formation have not been tested and
additional diamond drilling is planned for the Mel deposit in 2005. In 2004, exploration began at the TNB South project that is approximately 100 kilometres
southwest of the City of Thompson. The property covered by this program is contiguous with the
southwest boundary of the OIC Leases held by Inco and extends 50 kilometres further to the
southwest. Canadian Royalties Inc., under the terms of an agreement entered into with Inco in
November 2003, has the right to earn a 50 per cent interest in the property covered by the
agreement by funding 100 per cent of exploration expenditures totalling Cdn.$5 million over five
years. Inco has a right of first refusal on all production from any commercial quantities of ore
discovered. During 2004, line cutting, a regional audio-magnetotellurics (AMT ) survey, nine
surface UTEM grids and two drillholes totaling 710 metres were completed. Further UTEM surveys and
diamond drilling are planned for 2005. In 2004, field exploration apart from Incos producing mines and development projects focused
on Australia, Brazil, Canada, China and Finland. In Brazil, an airborne geophysical survey carried out at Aguapei in the state of Mato Grosso
located a number of potentially interesting anomalies. Ground follow-up geophysical and geological
surveys were carried out on a number of these anomalies and drill-testing of targets started at the
end of 2004. By the end of January 2005, four drill holes had been completed, three of which
intersected gabbro and norite intrusive bodies with extensive disseminated sulphide mineralization.
Assay results from these drill holes are pending. A letter of intent was negotiated with Japan
Oil, Gas and Metals National Corporation ( JOGMEC), with this letter of intent to be
replaced by a definitive joint venture agreement, under which JOGMEC will have the right to earn a
49 per cent interest in the Aguapei property by spending $2.5 million over a 36-month period. Inco
will be the operator of the project. Our reconnaissance program in Brazil with Teck Cominco
Limited was terminated in 2004. In Australia, a number of option/joint venture agreements covering grassroots nickel
exploration properties were entered into with Australian mining companies. These include three
agreements covering properties in Western Australia and another three agreements covering
properties in South Australia. In addition, Inco acquired, by staking, land positions in South
Australia and New South Wales. Airborne geophysical surveys were carried out over four properties
and several targets were drilled on one property. Follow up programs are planned on all of these
properties in 2005. Work continued on the tenements covered by Incos joint venture with LionOre
Australia Pty Ltd. in Western Australia, where ground geophysical surveys and drilling were carried
out. In the event of a discovery, Inco would have the right to participate in further exploration
on the discovery area to maintain the right to purchase the production from the discovery and an
equity position if the discovery is a major deposit. This program will continue in 2005. In Canada, Inco has active joint ventures with Aurora Platinum Corp., Soquem and Superior
Diamonds Inc. to explore certain areas in Ontario and Quebec using historic Inco airborne and
ground follow-up geophysical data. Inco retains a right to purchase any nickel, copper and PGMs
produced from the properties covered by these joint ventures, as well as the right to buy back into
any properties acquired or elect to take a royalty. Inco is using the balance of its historic
airborne database to develop nickel-PGMs targets throughout Canada. On Baffin Island, Inco has
entered into a data-sharing agreement with De Beers Canada Exploration Inc. to explore for nickel. In Finland, Inco is exploring under a joint venture with Korea Resources Corporation in the
Lapland area of Northern Finland for nickel-copper-PGMs deposits. Inco continued to evaluate exploration projects in China during 2004. Exploration continued
on the areas covered by two cooperative joint venture agreements in Jilin province, one with Jilin
Nickel Industry Group Ltd. and the other with Geological Survey Institute, Jilin Province.
Exploration is planned to continue under these agreements in 2005 with drilling and follow-up
surveys of airborne geophysics surveys having been completed in 2004. Preliminary ground follow-up
surveys were carried out in areas covered by memorandums of understanding covering exploration
areas in Yunnan province and are planned in Sichuan province in early 2005. We continue to
evaluate other exploration targets in China. See Voiseys Bay Nickel Company Limited  Voiseys Bay Deposit above for information on
exploration activities at the Voiseys Bay project. 49




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All of the estimated ore reserves referred to in this section are included in the table
entitled Company-wide estimated ore reserves under Ore Reserves and Mineral Rights above. 
 Research and Development Incos central research and development facility, J. Roy Gordon Research Laboratory
(JRGRL), is located in two separate facilities in Sheridan Park, Mississauga, Ontario. JRGRL is
operated by Inco Technical Services Limited (ITSL), a wholly-owned subsidiary of Inco Limited.
ITSL also provides engineering, project management and information technology services to Incos
operating locations and development projects. Our research and development activities at JRGRL are
organized into two groups, process research and product research. Inco believes that it is a nickel industry leader in research and technology development. Our
research and development focus is closely aligned with our key strategic objectives. Our major
research and development projects currently include the development of metallurgical and
environmental process improvements for existing operations, process development work for the
Voiseys Bay and Goro projects, and the development of proprietary, value-added nickel products.
Research and development expenditures totalled $29 million in 2004, compared with $27 million in
2003 and $17 million in 2002, representing continued significant expenditures on the
hydrometallurgical research and development program for the Voiseys Bay project. In 2004, ITSL
began a reorganization and voluntary down-sizing of its research and development and engineering
departments which is expected to be completed in 2005. ITSLs process research and process engineering groups work in close cooperation with
personnel at Incos operating locations, and with the Voiseys Bay and Goro project teams. At
Incos existing operations, this work is aimed at developing opportunities for increased operating
earnings through process modifications. At our Ontario operations, the process research group
continued to assist in improving metals recoveries at the Clarabelle Mill, the Copper Cliff Smelter
and the Copper Cliff refineries in 2004. Further progress was made in 2004 towards improving
smelter efficiencies through improved utilization of our major process equipment, and in developing
practical alternatives for the continued reduction of emissions from the Copper Cliff Smelter. At our Manitoba operations, the combined processing of ores from Thompson and Birchtree mines,
producing a single concentrate of uniform composition, was successfully demonstrated at the mill,
to replace the less-efficient separate processing of ores from these two mines. Higher concentrate
grades are now considered to be possible, which may allow smelting through only one furnace at
Thompson. The process research group is also responsible for developing the most cost-effective,
environmentally responsible processes for the recovery of nickel, cobalt and copper from the
Voiseys Bay and Goro ores. During 2004, the process research group carried out a successful
program to develop and demonstrate our proprietary Voiseys Bay hydrometallurgical process on a
mini-pilot plant scale. High nickel extractions of at least 97 percent were consistently achieved,
and full-size cathodes of excellent purity were produced from concentrate produced at the pilot
plant from Voiseys Bay ore. We also tested the Activox9 process owned by Western
Minerals Technology Pty Ltd. (WMT) of Australia on Voiseys Bay concentrate for comparison with
our own process. Inco has the option to use Activox for the Voiseys Bay project under a licence
agreement entered into with WMT in March 2004. Residues from Incos hydrometallurgical process are
currently being subjected to intensive environmental testing. The results of the mini-plant
testwork have been incorporated into the design of the Voiseys Bay demonstration plant currently
being built at Argentia in the Province of Newfoundland and Labrador. Concurrently with the
development of the hydrometallurgical process for Voiseys Bay, the process research group is also
testing a back-up matte refining process. Inco maintains a highly-focused product research group that concentrates on creating and
commercializing new, proprietary, value-added nickel products, as well as new applications for
existing products. It also provides technical support to customers for these products. The
product research group works in close collaboration with Inco Special Products, which has
responsibility for all business activities related to our specialty nickel products. Projects are
led and conducted using cross-functional teams. A stage-gate process is employed to evaluate the
potential technical and business success of proposed projects. The rechargeable battery, powder-metallurgy, electronic and other markets continue to grow and
broaden into diverse applications, creating new requirements for specialty nickel products. To
serve these rapidly evolving markets, Incos product research group has been developing new
extra-fine powders, nickel foams and cathode materials for applications in batteries, fuel cells
and filters. During 2004, we continued the development of T110PM10, a fine nickel
powder with applications in the powder metallurgy industry.   9
    
    Trademark of Western Minerals Technology Pty
Ltd.10
    
    Inco trademark 50




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The properties of this product were further improved and technical papers describing the
product were presented in 2004. This product is now being sold commercially. The development of fine nickel powder for applications in multi-layer ceramic capacitors also
continued at the laboratory, pilot plant and plant scales in 2004 as improvements in product
characteristics and optimization of our manufacturing processes were achieved. 
 Metals Recycling Incos subsidiary, The International Metals Reclamation Company, Inc.
(Inmetco)11, located near Pittsburgh, Pennsylvania, is a world leader in metals
recycling. Using proprietary Inco technology, Inmetco recycles nickel, chromium and iron from
stainless steel mill and metal finishing wastes and nickel and cadmium from spent batteries. Inmetcos net sales to customers, which are included in Other in the table under Sales
above, were $50 million in 2004, compared with $35 million in 2003 and $30 million in 2002. Certain feedstocks and by-products of Inmetcos process are regulated as hazardous or residual
wastes by the U.S. Environmental Protection Agency (the EPA) and the Commonwealth of
Pennsylvania. While such regulation increases the demand for Inmetcos services in some respects,
it also increases Inmetcos operating costs. We expect that in the years ahead EPA and the
Commonwealth of Pennsylvania may issue a number of new regulations that could impose additional
costs on Inmetcos operations, while other potential rules could reduce regulatory burdens. We are
not able to predict at this time the effect that such additional regulations could have on its
operating costs and financial condition. 
 Environment, Health and Safety Incos operations are subject to numerous environmental laws and regulations relating to,
among other things, air emissions, water discharges, soils, recycling and waste management,
decommissioning and reclamation, and employee health and safety. While environmental requirements
vary considerably from country to country, future laws and regulations may be expected to impose
stricter environmental requirements on the mining and metals processing industries in general, and
on specific uses of certain metals. We devote considerable resources to our performance under and
compliance with the environmental, health and safety laws and regulations to which we are subject.
However, the impact of future laws and regulations in these areas on the Company cannot be
predicted with any degree of certainty. 
 Environmental and Health and Safety Management Systems In 2001, Incos Canadian operations began to develop and implement formal environmental
management systems conforming to the Mining Association of Canadas Environmental Management
Framework (EMF). The EMF also conforms to the ISO 14001 Environmental Management System Standard
(ISO 14001). Our operations in the United Kingdom, ITL, Jinco and Taiwan Nickel have been
certified to ISO 14001. In order to conform to ISO 14001, in 2001, we broadened our environmental, health and safety
policy to include policies related to social responsibility and sustainable development and to
include pollution prevention as key elements of its policy. Work also began on the identification
and ranking of environmental aspects and effects relating to our operations and the development of
action plans to deal with any significant environmental effects. This work continued in 2004. In 2001, Inco established an internal working group to undertake an analysis of current health
practices and activities in its operations in Canada and the United Kingdom with a view to creating
a single overarching health management system which would provide a mechanism for workplace health
management to assist in meeting applicable legal and other health requirements. In mid-2002, we
elected to develop an integrated health, safety and environmental management system consistent with
the OHSAS 18001 Occupational Health and Safety Management System, the ISO 9001 Quality Standard,
ISO 14001, and the EMF. The integrated Inco health, safety and environmental management system was
completed in April 2004 and is expected to be implemented on a Company-wide basis in 2005.   11
    
    Inco trademark 51




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Environment, Health and Safety Audits Inco has, since 1990, conducted environment, health and safety (EH&S) audits at its
wholly-owned operating facilities as well as at operations in which it has at least a 50 per cent
equity interest and certain affiliates in which it has less than a 50 per cent equity interest.
The EH&S audit program is reviewed annually by an external consultant in order to provide us with
an independent review of the program, evaluate the extent to which the program is meeting our goals
and objectives, and determine whether the program is in accordance with standard industry audit
practices. The current focus of our EH&S audits has been on conducting management system audits
that seek not only to identify problems but also to examine the root cause of these problems and
correct deficiencies in the system. The program currently comprises 17 key areas (six
environmental, two health, eight safety and one administrative). Audit results are reported to the
facility management, which develops an action plan to correct any deficiencies. The Environment,
Health and Safety Committee of Incos Board of Directors oversees the program, reviewing audit
findings and action plans. EH&S audits were conducted at 11 facilities worldwide in 2004. 
 SO2Emissions Sudbury Total sulphur dioxide (SO2) emissions at Incos Ontario smelting operations were
209,000 tonnes in 2004, below the current maximum SO2 regulatory emission limit of
265,000 tonnes which was established by the Government of Ontario in 1994. These emissions
totalled 169,000 tonnes in 2003 and 243,000 tonnes in 2002. The lower level of SO2
emissions in 2003 was due principally to the three-month strike at our Ontario operations referred
to above. In February 2002, the Ontario Ministry of the Environment (MOE) issued a control order (the
February 2002 Control Order) that requires us to reduce SO2 emissions by 34 per cent
from the current limit of 265,000 tonnes to 175,000 tonnes at our Ontario smelting operations by
the end of 2006, and reducing the limit for SO2 ground level concentrations (GLCs) by
32 per cent, from the then current level of 0.50 parts per million (ppm) to 0.34 ppm. GLCs refer
to the concentrations of SO2 at ground level after being emitted from the emissions
stack and forced to the ground by atmospheric conditions rather than being dispersed. Fugitive
emissions (emissions which are caused when SO2 gases exit our operations through roof
ventilation equipment, windows, doors and other openings) are also controlled under this order.
During 2004, there were 11 exceedances of the new GLC limit (nine from the stack at the Ontario
operations and two fugitive exceedances). This compares with seven exceedances in 2003 (four from
the stack at the Ontario operations and three fugitive exceedances). The increase in exceedances
in 2004 was due in part to the imposition by the MOE of a new method of counting exceedances.
Under the new method, an event that registers as an exceedance on more than one monitor is counted
as a separate exceedance for each monitor that registers the exceedance. We are subject to
possible regulatory action, including fines, as a result of these exceedances, but we have not
received any indication from the MOE whether or not any charges will be laid. In order to continue
to meet the SO2 and GLC limits, it is likely that the Ontario operations smelter will
be operated at reduced capacity for brief periods over the next few years when adverse
meteorological conditions, such as temperature inversion events or the absence of wind, for plume
dispersal exist. We do not, however, currently expect that compliance with the annual
SO2 emission levels from our smelter operations or GLCs levels as
set forth in the February 2002 Control Order will have any significant effect on our costs,
operating procedures or annual production of nickel and other primary metals from our Ontario
operations. We are currently implementing an investment of approximately $90 million in fluid bed roaster
(FBR) off-gas scrubbing technology intended to reduce SO2 emissions to the new levels
mandated by the February 2002 Control Order by the end of 2006. This FBR project is also expected
to have the added benefit of decreasing total metal emissions of nickel, copper, arsenic and lead
by 80 to 100 tonnes per year. The FBR project involves the installation of water scrubbers that
clean the SO2 gases by removing principally particulate matter. The SO2
gases are then directed to the acid plant to be converted into sulphuric acid. The FBR project
will also provide us with the ability to treat the same types of gases coming from certain other
smelting furnaces. As part of the February 2002 Control Order, we will also be required to (i)
continue research into the technology and economics of further reductions in SO2
emissions and (ii) report annually to the MOE and the public on the progress of this research
program. The February 2002 Control Order calls for a final report on achieving the additional
reductions to be submitted by December 31, 2010. In June 2004, the MOE released a discussion paper on new regulatory proposals for an
Industrial Emissions Reduction Program (IERP) and in mid-February 2005 published a draft
regulation that, if implemented without changes, would require Inco to limit its annual
SO2 emissions to 66,000 tonnes by 2015. The IERP would require reductions in
SO2 emissions by 2015 that would equate to a 75 per cent reduction from the existing
limit of 265,000 tonnes per year referred to above. We have responded to these proposed reduction
proposals included in the IERP, indicating what our current ability to meet these requirements
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of the current limits of existing SO2 emission control technologies. We currently
believe that the proposed reductions set forth as part of the IERP and the proposed regulation will
be included in legislation to be drafted in 2005 for comment. If such proposed reductions were to
become law, we believe that those reductions would be consistent until 2015 with the requirements
of the February 2002 Order and we would, accordingly, be able to meet those proposed reductions
through 2015. However, if the reductions proposed by the IERP and the draft regulation referred to
above for 2015 and beyond were to come into effect, we cannot predict whether, based upon the
limits of existing technologies and the costs required to implement changes in our processes or
otherwise, we would be able to meet them on a cost effective basis. In September 2004, Environment Canada published a notice indicating its intention, under the
Canadian Environmental Protection Act(CEPA), to control emissions from base metal smelters and
refineries using pollution prevention planning and a code of best practices for this sector. The
notice also set forth a set of proposed interim and final emission targets that each smelter in
Canada, including our facilities in Ontario and Manitoba, would be expected to meet. For the
smelter at our Ontario operations, these targets are, for SO2, an interim target of
176,000 tonnes to be met by 2008 and a final target of 38,000 tonnes to be met by 2015 and, for
particulates, an interim target of 1,430 tonnes to be met by 2008 and a final target of 275 tonnes
to be met by 2015. Environment Canada provided for an 18-month period, commencing in September
2004, for companies to indicate whether they could develop a plan to meet their proposed new
targets on certain emissions. We are currently assessing the implications of the proposed targets
on emission limits developed by Environment Canada on our Ontario and Manitoba operations and have
been discussing with Environment Canada and other parties how to develop an approach to such
proposed limits that will meet the objectives of all parties. While we are not able to determine
the effect, if any, that the reductions proposed in the IERP and draft regulation referred to above
and these other recent developments and other significant future changes in regulatory emission
limits and other environmental laws and regulations that may be enacted in the future may have on
our operations, due to the uncertainty surrounding the timing and ultimate form that such changes
may take, any such changes could have a material adverse effect on our business, results of
operations, financial condition and liquidity. Canada signed and ratified the Kyoto Protocol to the United Nations Framework Convention on
Climate Change (the Kyoto Protocol) in December 2002. The Kyoto Protocol calls for significant
reductions in the emission of greenhouse gases, such as carbon dioxide, and nationwide ceilings on
such emissions. In November 2002, the Canadian federal government released an initiative to
address certain causes of climate changes. The specific requirement of this initiative is also to
limit the discharge of carbon dioxide and other greenhouse gases. Neither the Kyoto Protocol nor
this other initiative has as yet established what the specific allocation of reductions among
various sources of greenhouse gases would be. In August 2003, the federal government of Canada
released certain principles covering the Kyoto Protocol intended to be used to implement the
objective of having the oil and gas, thermal energy and mining and manufacturing sectors reduce
greenhouse gases by certain specified limits. While during 2004 there was relatively little
progress on advancing the implementation of greenhouse gas emission reductions as part of the Kyoto
Protocol, the Kyoto Protocol was ratified or confirmed on an international basis on February 16,
2005. While the precise impact of the Kyoto Protocol and its ratification or confirmation on our
operations in Canada and the operations of others who provide energy or other products or services
to us is uncertain at this time, we anticipate that compliance with these initiatives could have a
significant adverse effect on our results of operations and costs. Thompson Incos smelter at Thompson, Manitoba operated during 2004 under a regulation issued by the
Manitoba government which limits emissions of SO2 from Incos Manitoba ores to 23,000
tonnes per month and 220,000 tonnes per calendar year. We met both of these limits during 2004,
with the total of such emissions at 192,200 tonnes for the year. These emissions totalled 191,000
tonnes in 2003 and 210,000 tonnes in 2002. As
noted above under SO2 Emissions  Sudbury, the notice published by Environment Canada
under CEPA in September 2004 included a proposed set of interim and final targets for annual
SO2 and particulate emissions that each smelter in Canada would be expected to meet.
For the smelter at our Manitoba operations, these proposed targets are, for SO2, an
interim target of 174,000 tonnes to be met by 2008 and a final target of 12,000 tonnes to be met by
2015 and, for particulates, an interim target of 735 tonnes to be met by 2008 and an final target
of 92 tonnes to be met by 2015. As noted above, Environment Canada provided for an 18-month
period, commencing in September 2004, for companies to indicate whether they could develop a plan
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Port Colborne and Sudbury Soils Inco has been working with regulatory authorities and other interested parties to
evaluate elevated levels of nickel and other metals in soils located in the vicinity of our
processing facilities in Sudbury and Port Colborne, Ontario that may have been affected by the
historical emission of windblown metal-containing particulates. Reference is made to Port
Colborne and Sudbury below. The processes and criteria by which remediation requirements are
determined in Ontario were issued by the MOE as a guideline in 1996 (the Guideline). The
Guideline specifies numerical soil concentrations above which environmental and human health
concerns are considered sufficient to warrant detailed risk assessments. Inco voluntarily agreed
to conduct such risk assessments and to remediate soils as necessary to reduce risks to negligible
levels in both the Sudbury and Port Colborne areas. In October 2004, after formal community-based
risk assessments were begun, the MOE issued a new regulation under the Ontario Environmental
Protection Act(the Regulation) which incorporated the Guideline. Since October 2004, Inco and
the MOE have been discussing when and under what circumstances the community-based risk assessments
relating to Port Colborne and Sudbury would be subject to the Regulation. Based upon these
discussions, it is unclear at this time whether these community-based risk assessments which are
being funded by Inco will fall under the Regulation, but we plan to complete our detailed
scientific measurements and risk assessments for these two communities and continue our discussions
with the MOE with respect to how those findings would satisfy the site-specific requirements
specified in the Regulation. Port Colborne The results of soil sampling by the MOE in Port Colborne which were released in January 2000
indicated a wide area having surficial soils with levels of nickel, copper and cobalt above the
generic levels established by the MOE for phytotoxicity. Based upon these results, Inco suggested
that a community-based risk assessment (CBRA) process, funded by Inco, would represent a more
objective, fair and efficient way of assessing any risks from these levels than conducting numerous
site-specific risk assessments. The CBRA process was accepted by the MOE and the City of Port
Colborne and in April 2000 the Port Colborne city council appointed a seven-member Public Liaison
Committee (the PLC), consisting of local citizens, to interface and work with us and our
consultants on the CBRA process. A stakeholder technical sub-committee was also formed consisting
of representatives of the MOE, the Regional Public Health Department, the City of Port Colborne,
Inco and consultants. In November 2000, the scope of work for the CBRA process was agreed upon and
work commenced. The CBRA process has focused on ecological and human health assessments involving
all potential pathways for exposure to specified chemicals of concern (CoCs), nickel, copper,
cobalt and arsenic, for all living species and all health endpoints. The soil sampling carried out by the MOE in Port Colborne showed lead levels higher than the
generic levels established by the MOE, but completely within the range found in older communities
throughout North America. It is generally believed that high lead levels in these communities were
caused principally by use of lead-based paints and leaded gasoline until the mid-1970s and the
improper disposal of lead-acid automobile batteries. Even though the Port Colborne refinery
emitted some lead-containing particulates during its approximately 80 years of operation, an
inventory of such emissions, together with air dispersion modelling, has shown that expected soil
lead concentrations from such emissions represent only a small fraction of the lead observed in the
soil. A comprehensive report on lead as a CoC within the CBRA was prepared by a consultant to Inco
in 2003 and peer reviewed in 2004. This report confirmed that Inco should not be held responsible
for the lead found in soils in Port Colborne. The objective of the CBRA has been to assess human and environmental health risks from
multi-pathway exposures to CoCs in Port Colborne. If risks are found to exist at unacceptable
levels, as defined by governmental authorities, then the CBRA will also recommend options for the
remediation of soils to remove those risks. As a result of this effort, the CBRA is intended to be
able to derive Port Colborne-specific soil concentrations for each CoC that will not be a risk for
environmental and human receptors in the community and all soil types and uses occurring in the
community. Significant progress was made in 2003 with the completion of two draft reports, one on
the natural environment and the second on commercial crops. Both of these reports underwent
extensive review by the consulting company hired to assist the PLC and by external independent peer
reviewers. Revisions to these draft reports in response to the reviews were completed in mid-2004.
A third report concerning certain relevant human health risks was completed and peer reviewed in
2004. Another report concerning certain other relevant human health risks is expected to be
completed and peer reviewed in the first half of 2005. While the results of the CBRA have not yet
been finalized, based on the information available to date, it appears that less than 100 hectares
of agricultural land could require remediation. While it is not possible to predict at this time
the exact area of such land or the cost of any required remediation, tests indicate that the
addition of limestone to the soils to adjust soil acidity would represent a cost-effective remedial
solution. In late March 2001, two developments occurred in connection with the historic operations of
Incos refinery in Port Colborne, Ontario: (i) the filing of a purported class action proceeding in
an Ontario court and (ii) the release of a report by the MOE covering 54




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elevated levels of nickel and other metals found in the soils at depth (below five
centimetres) on 16 out of nearly 180 properties sampled by the MOE in Port Colborne (the March
2001 Report) and the issuance of a draft remediation order by the MOE. The purported class action proceeding originally filed against Inco and several other parties
under Ontario class action proceedings legislation claimed Cdn.$600 million in compensatory damages
and Cdn.$150 million in punitive damages covering certain residents who lived in the Port Colborne
area since 1995 and allegedly suffered a decline in their property values as a result of, and
health and other injuries from exposure to, metals and related emissions from the refinery. In
June 2002, hearings were held in the Ontario Superior Court of Justice to consider whether this
action, or any portion of it, should be certified to proceed as a class action. In July 2002 the
court rejected certifying any part of the action as a class action. The nominal plaintiff appealed
this decision and the appeal, which revised the original pleadings and focused only on the
plaintiffs claim for damages for property value diminution, resulting in a significant reduction
in the number of citizens that the plaintiff is purporting to represent, was heard in June 2003.
In February 2004, the Ontario Divisional Court rejected the plaintiffs appeal. The plaintiff
subsequently sought leave (permission) to appeal to the Ontario Court of Appeal. Leave to appeal
was granted in September 2004 and it is currently expected that the appeal concerning whether this
action should be certified as a class action under applicable Ontario law will be heard in the late
spring of 2005. With respect to the issue of the finding of nickel, in particular nickel oxide as the primary
form, at various depths in the Port Colborne soils adjacent to the Port Colborne refinery, the
March 2001 Report established an intervention level of 10,000 ppm or more of nickel as a potential
health risk and soil samples taken by the MOE reflected nickel concentrations above this level on
16 properties. While Inco did not accept the March 2001 Reports findings and conclusions, in
response to the report it proposed a voluntary remediation program for the 16 properties whereby
Inco offered to remove and replace the soil on these properties to bring them below the 10,000 ppm
level. In April 2001, Inco submitted a detailed comment letter to the MOE on the March 2001 Report.
Based upon such key issues as what the exposure pathways would be and the level of exposure from
nickel oxide and other forms of nickel found in the soils at depth, we did not believe that the
levels of nickel found as reported in the March 2001 Report represented a health hazard. In May
2001, the MOE indicated that, given the comments it had received on the March 2001 Report from Inco
and others, it would effectively be withdrawing the report and draft order and would be undertaking
further studies and analyses. A revised draft report was issued for public comment by the MOE in
late October 2001 together with a new draft order which would have required that 25 properties,
based upon the soil sampling by the MOE reflected in the March 2001 Report, be remediated given a
slightly lower intervention level for nickel, 8,000 ppm, established by the MOE in its revised
report. Inco submitted a new comment letter to the revised report and revised draft order in late
November 2001. In March 2002, the MOE released its report and order in final form (the March 2002
Report). It contained a somewhat different methodology for calculating health risks for certain
pathways, but retained 8,000 ppm nickel in soils at depth as the intervention level, and the MOE
issued a broad order to Inco to remediate properties having soil nickel levels above that level and
undertake certain other activities (the March 2002 Order). We did not believe the intervention
level of 8,000 ppm nickel in soils at depth was supported by the scientific information available
and believed that the March 2002 Order imposed a number of other remediation and sampling
obligations that were not supported by the findings in the March 2002 Report. In April 2002, Inco appealed the March 2002 Order. A group of citizens also appealed the
March 2002 Order, asserting that it was too lenient. The appeals were heard by the Ontario
environmental review tribunal, starting with preliminary sessions in November 2002. On the first
day of the preliminary hearing, motions were made by both appellants regarding the scope of the
hearings. Inco moved that the appeal should deal only with human health risk associated with
systemic nickel intake, which was the basis of the March 2002 Order. The citizens group, on the
other hand, argued that the hearings should consider all environmental endpoints and also
respiratory cancer. The review tribunal accepted Incos motion to limit the scope of the appeal to
issues arising from the March 2002 Order only. Counsel for the citizens group appealed this
decision by way of a judicial review, which was heard in March 2003. The judicial review concluded
that the review tribunal was correct to limit the scope of its hearings and the hearings resumed in
September 2003. As a result of Inco receiving clarification from the MOE on the scope of the March
2002 Order, and with the agreement of the citizens group to withdraw its appeal, the appeal was
withdrawn and the March 2002 Order was re-instated with an expiry date of December 2004. Notwithstanding the legal actions regarding the March 2002 Order, Inco kept its voluntary
remediation program open for the original 16 properties and extended it to the additional nine
properties identified by the MOE in the March 2002 Report as having in excess of 8,000 ppm nickel
in soil at depth (the 25 Properties). Three property owners chose to participate in our
voluntary remediation program to have us remove and replace the soil on their properties in 2001
and two more participated in 2002. All but one of the remaining 20 of the 25 Properties were
remediated in 2004 and it is currently expected that permission for us to remediate the final
property will be obtained in 2005. 55




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In April 2001, in response to the draft order accompanying the March 2001 Report, Inco
voluntarily undertook additional sampling in residential areas adjacent to the area where the 25
Properties were located. Based upon this additional sampling by Inco, no additional properties
were found to require remediation. As part of the CBRA process, Inco agreed to carry out a special health survey of Port Colborne
residents, to be conducted by a team of medical experts, to determine if adverse health effects
linked to CoCs in the soils are currently being experienced by people in the community. We
retained Ventana Clinical Research Corporation (Ventana) to conduct this work. During 2001,
Ventana interviewed citizens in the community and medical professionals and presented a conceptual
scope of work in October 2001. This scope of work was reviewed, revised and prioritized by the
stakeholders during 2002. A study of the incidence of hospital admissions in Port Colborne
relative to a number of comparative communities was completed in December 2003 but significant
problems with the method of statistical analysis were found during peer review. As a result, the
study was revised and reissued in October 2004 and is currently under peer review. A second study
on self-reported health status was completed in November 2004 and is also undergoing peer review.
A determination of the need for potential case-control studies will be made, based on the results
of the two completed studies, by a panel of scientific and medical experts. Another proposed study
on the incidence of cancer among the Port Colborne population has been hampered by scientific
design problems and it is unclear at this time whether this study can be conducted. At the beginning of the CBRA process in 2000, we also agreed to undertake a study on the
socio-economic impacts that the CoCs in soils may have or may be causing. Efforts to draft an
appropriate scope for such a study have been unsuccessful and it is unclear if such a study will
ultimately be conducted by us. Given the existence of various legal appeals and scientific and medical studies currently
underway, it is impossible to predict at this time the effect that these actions and studies could
have on the Companys business, results of operations and financial condition. Sudbury In September 2001, the MOE released a report indicating that it had analyzed soil samples
collected within the Sudbury area for various substances, including arsenic and certain other
metals. This report stated that nickel, copper, cobalt and arsenic in some soil samples were in
excess of the applicable MOE guidelines and that the elevated concentrations of these metals in the
soils were attributable to the history of nickel-copper mining and smelting in the area by Inco and
Falconbridge. The two companies agreed to jointly fund risk assessments for human and
environmental health in the Sudbury region. They have also joined the MOE in extending soil
sampling to areas in the area that were undersampled. The Sudbury area soil data in the MOEs report showed nickel concentrations lower than those
found in Port Colborne soils, but the potential area affected in Sudbury is larger than in Port
Colborne. Some of the work being conducted at Port Colborne will be applicable to Sudbury, but the
risk assessment for Sudbury must be based on the specific soil types located there. During 2001,
the City of Greater Sudbury, the Regional Health Department, the MOE, Inco and Falconbridge formed
a technical committee (the Sudbury Technical Committee), with Health Canada participating on
behalf of First Nations communities, to guide the risk assessment work on nickel, copper, cobalt
and arsenic in soils and other related environmental media. This action was followed by the
formation of a public advisory committee consisting of ten citizens and the appointment of a
process observer responsible for reviewing the timeliness, effectiveness and transparency of the
risk assessment process. In 2002, the Sudbury Technical Committee defined the scope of work for the human health and
environmental health risk assessments, issued a comprehensive request for proposals to carry out
the assessment, reviewed six proposals submitted and chose the winning bid based on technical,
economic and public communication criteria. The risk assessments are being carried out by the
Sudbury area risk assessment group (SARA), a consortium of firms having the collective experience
necessary to conduct this multi-disciplinary project. The consortium includes a number of
environmental management and analytical firms. Work was started under a preliminary contract in
December 2002 and the final contract was signed by Inco and Falconbridge in 2003. Public consultation as part of this process was carried out in 2003 and will continue
throughout the risk assessment process. The analysis of several thousand new soil samples was
completed by SARA and two additional elements, selenium and lead, were added to the list of CoCs
for the community. Recent indoor sampling indicated elevated levels
of lead in certain residences. This data will also be evaluated as
part of the studies being undertaken. The risk assessments are generally scheduled to be completed by mid-2005.
Toxicology Excellence for Risk Assessment (TERA), a U.S.-based non-profit corporation, has been
engaged to undertake the peer reviews of SARAs work. Incos share of the total cost of
TERAs work is currently estimated at about $2 million. It is impossible to predict what remediation may be
recommended from these assessments but the Sudbury area has undergone successful re-vegetation
efforts over the last several decades and has experienced a significant ecological recovery. 56




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Decommissioning and Reclamation Inco is committed to decommissioning its facilities, at both existing and inactive mine
sites, in an environmentally sound manner commonly referred to as progressive decommissioning.
In Ontario, progressive decommissioning is ongoing at the Copper Cliff tailings area where exposed
tailings are being covered. In 2004, we continued to maintain more than 1,500 hectares of
vegetated cover on inactive tailings for stabilization purposes. We also continued in 2004 our
decommissioning and reclamation projects at both operating and non-operating properties in Ontario,
including demolition and closure work at Shebandowan, Crean Hill and Frood-Stobie mines,
re-contouring at Whistle Mine, tree planting and groundwater assessment. In Manitoba, our
reclamation plans for Thompson Mine and the Thompson processing facilities were accepted by the
Manitoba government. Reference is also made to Future Removal and Site Restoration; Closure and
Post-Closure Plans below. 
 Re-vegetation Programs A significant part of our environmental programs in both Canada and Indonesia involves
the re-vegetation of mined-out lands and areas affected by mining and processing activities to
return them to a natural state. In 2004, we produced about 200,000 seedlings, mainly red pine, in greenhouses at our Ontario
operations in Sudbury. We normally produce an additional 50,000 seedlings every year at our
underground nursery located at the 4,600-foot level of Creighton Mine, but the nursery was closed
in 2004 due to maintenance operations in this area of the mine. The temperature and humidity are
constant at this level of the mine and are ideally suited for starting seedlings using automated
watering and lighting systems. Approximately one-half of the 200,000 seedlings grown in 2004 were
planted on our own property. The remainder were donated to the City of Sudbury and various
community groups for planting. At PT Inco in Indonesia, reclamation efforts continued to focus on returning to mined-out
areas the waste rock and soil that was removed to access the ore and planting trees in these areas.
The objective of this program is to maintain the size of the mine footprint to a maximum of 1,000
hectares and restore mined-out areas to their natural state. In 2004, the size of the maximum mine
footprint that can be maintained without re-vegetation was increased from 650 hectares to 1,000
hectares, reflecting the increased mining activity associated with increased nickel production. 
 PT Inco PT Incos operations are subject to environmental regulations and permits issued by the
Government of Indonesia. PT Inco is in compliance with these permits except for intermittent
releases of soluble nickel, manganese and chromium in its liquid effluent discharges into a small
stream adjacent to its operations and the levels of emissions of particulates from its facilities.
In recent years, PT Inco has implemented a number of projects which have reduced the levels of
nickel, manganese and chromium in its effluent discharges and is continuing its efforts to bring
these levels within the regulated limits. By dredging, PT Inco has been able to increase the
retention capacity of its sediment ponds. As a result, nickel and manganese concentrations in
effluent were within the regulated limits in 2004. In addition, releases of hexavalent chromium
were reduced below the regulated limits by the fourth quarter of 2004. Since 2000, PT Inco has also had a program in place with the government for investigating the
most effective way to further reduce its particulate emissions. This program includes an action
plan and periodic reporting to the government. PT Inco also initiated a dust handling program in
1999 to address issues associated with various dust-handling processes at PT Inco. This program
included the installation of equipment, in particular additional electrostatic precipitators
(ESPs), and other solutions to reduce dust emissions. The principal sources of dust emissions
and other particulate emissions from PT Incos facilities are PT Incos dryers, reduction kilns,
converters and electric furnaces. A new ESP was constructed and commissioned on one of PT Incos
three dryers in 2001 and operated in 2002, so that all of PT Incos dryers had installed ESPs.
This investment has resulted in a substantial decrease in dust from this source and PT Inco is now
in compliance with permitted dust emissions levels from its dryers. Modifications to the ducting
to one of PT Incos five kilns resulted in decreased dust emissions and these modifications were
subsequently made to the other two similar kilns. Two newer kilns were equipped with ESPs and
operate at low dust emissions, below permitted levels. In 2004, all five kilns at PT Inco were in
compliance with permitted dust emission levels. PT Inco has also installed an automated pneumatic
dust handling system which collects and transports dusts for reprocessing and standby blowpot
systems have been installed on four of PT Incos kilns to allow maintenance to be performed without
interrupting the control and collection of dust. The fifth kiln was constructed with standby
blowpot capacity, thus providing that all five kilns now have this standby capacity. An audit of
the blowpot systems is scheduled in 2005 and it is expected that the audit will recommend further
improvements to enhance the systems 57




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performance and reduce fugitive emissions. PT Incos three converters are in compliance with
permitted dust emission levels. The principal remaining sources of dust emissions are PT Incos
four furnaces and PT Inco and an independent engineering firm have studied and used a pilot test
program to evaluate options for cleaning the furnace off-gases to meet permitted dust emission
levels. Based upon the results of the pilot test program, we began the installation of certain
control equipment on one of PT Incos furnaces in the fourth quarter of 2004 and testing of
equipment is scheduled for 2005. If this control equipment is successful, we currently plan to
install the same dust control equipment on the three remaining furnaces to meet these dust emission
limits over the 2006-2007 period. If it is not successful, we plan to evaluate other options to
meet these dust emission limits. Workplace dust issues are also being addressed to improve workplace quality. During 2004,
further significant improvements were realized as part of PT Incos overall dust handling program,
including a modification of the dust collection system of the kilns to allow for increased dust
capture. While PT Inco (i) has kept the relevant governmental authorities apprised of those
situations where it has not been in compliance with certain emission limits as noted above, (ii)
has been working with these governmental authorities in respect of such regulatory issues and (iii)
has not received any indication from such governmental authorities that it would be subject to any
penalties or sanctions for such exceedances, PT Inco may still be subject to regulatory actions by
such governmental authorities for non-compliance with certain emission limits. 
 Future Removal and Site Restoration; Closure and Post-Closure Plans The following includes information that appears in Managements Discussion and Analysis
of Financial Condition and Results of Operations under Item 7 of this Report and in Notes 1 and 13
to the financial statements under Item 8 of this Report. Our operations have been, and may in the future be, affected from time to time in varying
degrees by changes in environmental laws and regulations, including those for asset retirement
obligations. Both the likelihood of future changes in laws and regulations and their overall
effect upon us vary greatly from country to country and are not predictable. Our policy is to meet
or, if possible, surpass environmental standards set by relevant legislation, by the application of
technically proven and economically feasible measures. The estimation of asset retirement obligation costs depends on the development of
environmentally acceptable closure and post-closure plans, which, in some cases, may require
significant research and development to identify preferred methods for such plans which are
economically sound and which, in many cases, may not be implemented for several decades. We have
continued to utilize appropriate technical resources, including outside consultants, to develop
specific site closure and post-closure plans in accordance with the requirements of the various
jurisdictions in which we operate. Typical closure and progressive rehabilitation activities
include, where applicable, demolition of buildings, removal of underground equipment, sealing of
mine openings, treatment to reduce or prevent acid generation from stockpiled waste materials such
as tailings, general clean-up activities aimed at returning the area to an environmentally
acceptable condition, and post-closure care and maintenance. In accordance with environmental regulations adopted by the Province of Ontario in 1991, we
developed rehabilitation and site restoration plans associated with the eventual closure of our
operations in that province. Three closure plans were filed by the end of 1997, having previously
received approval from the Province of Ontario for the consolidation of our operating mines and
properties in that province into 15 sites for purposes of closure plans, and the remaining 12
closure plans were filed by the end of 1998. As a result of provincial regulatory changes which
became effective in 2000, the plans were re-filed to meet these changes in 2001. We have continued
to develop future tailings disposal and water management alternatives to accommodate up to
approximately 40 years of future production. We believe that cost-effective tailings disposal
alternatives exist within the ongoing operating activities of the Sudbury operations which would
limit site restoration at closure to a care and maintenance activity, thus significantly reducing
the costs of such site restoration. In accordance with environmental regulations adopted by the Province of Manitoba in 1999, we
have developed reclamation plans associated with the eventual closure of operations in that
province. The Province of Manitoba has accepted the closure plans for all of our operations in the
province. Closure plans for the proposed mine and mill facilities were prepared and submitted in 1998 in
connection with the environmental review process of the Voiseys Bay project in the Province of
Newfoundland and Labrador. This plan, as updated, was submitted to the province in August 2004.
Closure plans were prepared for the Goro nickel project. The closure plan for the original
tailings impoundment and overburden storage areas for the Goro project were included in our
operating permit (installation classée)application dated May 2004. This operating permit was
issued in October 2004 but will be subject to amendment to reflect the revised project
configuration developed as part of Phase 2 of the review process discussed under Goro Nickel S.A.
above and, as a result of 58




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the revised project configuration, the closure plan may also have to be amended to take into
account any changes to the tailings impoundment and other storage areas. We follow a policy of progressive rehabilitation at our Indonesian operations whereby land
disturbed by mining activities is re-vegetated on an ongoing basis. A closure plan for PT Inco was
revised in 2004 to cover all relevant facilities of PT Inco. Closure plans have been completed for the operating facilities in the United States and the
United Kingdom. Based on currently available information, there are no required significant site
restoration activities associated with these facilities. Substantial environmental expenditures are incurred on an ongoing basis which are intended to
significantly reduce asset retirement obligation costs that may otherwise be incurred following the
closure of any sites. This progressive rehabilitation includes tailings management, land
reclamation and re-vegetation programs, decommissioning and demolition of plants and buildings, and
waste management activities. Operating costs associated with ongoing environmental and reclamation
programs, including progressive rehabilitation, aggregated $20 million in 2004, $39 million in 2003
and $13 million in 2002 and are included in cost of sales and other operating expenses. Capital
expenditures on environmental projects were $41 million in 2004, $28 million in 2003 and $9 million
in 2002. We currently anticipate that capital expenditures on environmental control and related
projects in 2005 will be approximately $90 million. Effective January 1, 2003, we adopted a new accounting standard of the Canadian Institute of
Chartered Accountants (CICA) relating to asset retirement obligations. This standard significantly
changed the method of accounting for asset retirement obligations as discussed in Note 2 to the
financial statements under Item 8 of this Report. The estimate of the total liability for asset
retirement obligations has been developed from independent environmental studies, which include an
evaluation of, among other factors, information available at that time with respect to closure
plans and closure alternatives, the anticipated method and extent of site restoration using current
costs and existing technology, and compliance required by presently enacted laws, regulations and
existing industry standards. The total liability for asset retirement obligations represents
estimated expenditures associated with closure, progressive rehabilitation and post-closure care
and maintenance. Potential recoveries of funds from the future sale of assets upon the ultimate
closure of operations have not been reflected in the estimate of the total liability or related
annual provisions or charges. Future changes, if any, to the estimated total liability, as a
result of changes in requirements, laws, regulations and operating assumptions may be significant
and would be recognized prospectively as a change in accounting estimate, when applicable.
Although the ultimate amount to be incurred is uncertain, the total present value of the liability
for asset retirement obligations in respect of our worldwide operations to be incurred primarily
after cessation of operations was estimated to be $174 million (including a current portion of such
total obligation of $3 million) at December 31, 2004 based upon certain discount rates and timing
with respect to when these costs would be expected to be incurred, compared with $149 million at
December 31, 2003 and $126 million at December 31, 2002 (including the current portions of such
total obligations). Changes made in 2000 to mining regulations in the Province of Ontario require us to provide
letters of credit or other forms of financial assurance intended to secure our ability to meet
future reclamation and restoration costs, which are not expected to be incurred for many years, if
we were to no longer meet certain minimum investment grade credit ratings for our outstanding
publicly traded debt securities. Although our debt securities are currently rated investment
grade, they were rated below investment grade in recent times and there can be no assurance that
this situation will not reoccur. If we were not able to maintain the minimum investment-grade
credit ratings, it is currently estimated that letters of credit or other forms of financial
assurance associated with the currently estimated costs of the eventual future closure of our mines
and other facilities in Ontario would have to cover approximately $762 million in such closure
costs on an undiscounted basis. Due to the closure of three mines in Ontario, in 2002 we were
required under such mining regulations to provide letters of credit in the amount of $22 million at
that time to secure these near-term closure costs as discussed below. In addition, we are subject
to certain Indonesian regulations which require us to provide security for the reclamation of land
areas that have been mined. In the case of our Manitoba operations, in 2003 we submitted closure
and reclamation plans for all of our operations in that province and in 2004 we provided financial
assurance in the form of a letter of credit in the amount of approximately $0.4 million for certain
future reclamation and restoration costs in that province. It is possible that this province may
require additional financial assurance with respect to our operations in Manitoba. However, it is
not currently expected that these costs for our Indonesian operations and/or such additional
financial assurance as might be required to be provided for our Manitoba operations will be of a
material amount. These potential costs might not be incurred until many years in the future. If
these requirements for letters of credit or other forms of financial security had to be satisfied,
they could have an adverse effect on the amounts available for borrowing by us under our bank
credit facilities. As of December 31, 2004, we had outstanding letters of credit in the amount of $23 million to
secure a portion of our closure costs related to the closure of three mines in Ontario. These
letters of credit have a term of one year and will automatically renew 59




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without any action by either us or the counterparty until the earlier of (i) Inco having
complied with the terms of the certified closure plans or (ii) funds from such letters of credit
being utilized by the Ontario Ministry of Northern Development and Mines, the ministry responsible
for overseeing such closure plans, to perform rehabilitation work if we did not meet the
requirements with respect to such closure plans. We are required to submit annual updates on
changes to the closure plans, including any decommissioning and rehabilitation work completed
during the previous year. We have also provided letters of credit or similar forms of financial
assurance to secure future closure costs associated with certain other operations or projects in
North America and elsewhere which currently have, or are expected to have, fairly extended useful
lives. We have also provided a letter of credit in the amount of approximately $7 million covering
certain remediation costs if we abandoned the construction of certain infrastructure at Voiseys
Bay. In view of the uncertainties concerning environmental remediation, the ultimate cost of asset
retirement obligations could differ materially from the estimated amounts provided. The estimate
of the total liability for asset retirement obligation costs is subject to change based on
amendments to laws and regulations and as new information concerning our operations becomes
available. Future changes, if any, to the estimated total liability, as a result of amended
requirements, laws, regulations and operating assumptions may be significant and would be
recognized prospectively as a change in accounting estimate, when applicable. Environmental laws
and regulations are continually evolving in all areas in which we operate.We are not able to
determine the impact, if any, of environmental laws and regulations that may be enacted in the
future on our results of operations or financial position due to the uncertainty surrounding the
ultimate form that such future laws and regulations may take. 
 Health and Safety The health and safety of our employees are of the highest priority. The prevention of
workplace accidents and illnesses is a major goal of Inco. Safety training and educational
programs for workers have continued to be enhanced at all of our operations and, through
international workshops, sponsored university research and other activities, Inco is a leader in
efforts to determine how to better test and assess the impact of metal compounds on humans and
ecosystems. Research Networks on Metals Inco was one of the major contributors to the Metals in the Environment (MITE) research
network which was initiated in Canada in 1998 and was sponsored, in part, by the Mining Association
of Canada. This program concluded in 2004 and yielded useful information on the sources of metals,
the movement of metals among environmental compartments and the toxicity of metals to aquatic and
terrestrial organisms. These results are already affecting the course of regulatory activity
relating to metals throughout the world. The data generated are assisting in carrying out
necessary risk assessments and in determining risk management strategies for the continued safe use
of metals such as nickel, copper and cobalt. As a logical extension of the stakeholder involvement created during MITE, a new network
funded by the Canadian Natural Sciences and Engineering Research
Council has been formed with
specific interest in filling information gaps in human health assessments involving metals. We
will continue to assist in this work through our membership in the Mining Association of Canada. Diesel Particulate Matter In 1995, the American Conference of Governmental Industrial Hygienists (ACGIH) announced its
intention to establish for the first time a threshold limit value (TLV) for diesel particulate
matter (DPM) of 0.15 mg/m3. This proposed TLV, based primarily on rat and mice
studies, constituted nearly a seven-fold reduction from the current Canadian target level of 1.0
mg/m3 DPM. If adopted by regulatory authorities in Canada, this would require
substantial changes in our use of diesel equipment in our underground operations since this
equipment emits DPM. We responded to the proposed TLV by making written and oral presentations to
the ACGIH in 1996, noting that toxicological and epidemiological studies on health effects of DPM
have given inconsistent and unreliable results and that it would, accordingly, be impossible to set
scientifically sound occupational exposure limits for DPM. For a discussion of TLVs, see
Regulation of Nickel and Other Nonferrous Metals  Occupational Exposure Limits (OELs) in Canada
below. The ACGIH did not take any action to adopt the TLV in 1997 or 1998. However, in 1999 the
ACGIH announced that it intended to further reduce the proposed TLV to 0.05 mg/m3 for
DPM of less than one micrometre in diameter. In 2001, it lowered this proposed TLV even further,
to 0.02 mg/m3, analyzed as elemental carbon. In 2003, however, the ACGIH removed the proposed TLV
for DPM from its Notice of Intended Change list and placed it on the list of Chemical Substances
and Other Issues Under Study, where it remains through the year 2005. It is not known whether the
TLV as proposed in 2001 (or some modification thereof) will be placed on the Notice of Intended
Change list again in the future. 60




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The U.S. Mine Safety and Health Administration (MSHA) initiated a rulemaking activity in
1998 to establish a regulatory exposure limit for DPM in underground mines in the United States.
Actions of this kind by MSHA are usually considered significant as Canadian provincial governments
often consider taking similar actions. After a period of extensive public comment, MSHA adopted
its new exposure limit in late 2000 of 0.4 mg/m3 DPM, determined using the total carbon
technique. (A proposal to change the measurement metric from total carbon to the equivalent of
elemental carbon is pending.) The new MSHA rule provided an 18-month phase-in period for companies
to achieve compliance, at which point the new limit would apply for a period of five years, after
which it would be reduced to 0.16 mg/m3. It is not known whether, when or how Canadian
provincial governments will respond with similar limits. Recognizing the importance of regulatory Occupational Exposure Limits (OELs) for DPM on our
operations in Ontario and Manitoba, as discussed under Regulation of Nickel and Other Nonferrous
Metals  Occupational Exposure Limits (OELs) in Canada below, in 1997 we helped form an
industry-labour-government research consortium, the Diesel Emissions Evaluation Program (DEEP),
to determine sampling and analytical techniques capable of measuring low levels of DPM and to
evaluate techniques capable of controlling DPM emissions in workplace air. DEEP has investigated a
number of research areas, in particular biodiesel, fuels, maintenance improvements, and the effect
of light duty vehicles on DPM in underground mines. In 2000, DEEP extended its original three-year
term to allow completion of field tests on particulate filters, which potentially hold the most
promise for cost-effective control of DPM. Several of these underground tests began at Incos
Stobie Mine in 2001 and were completed in December 2004. The final report on the Stobie Mine
results is expected to be available in 2005, as is the DEEP final report. The adoption by Inco of
ultimate DPM control strategies developed by DEEP, and the cost of such adoption, will depend on a
number of factors, including the types of engines used and their duty cycles as well as the final
regulatory limit that we will be required to meet. WSIB Occupational Disease Policies Inco is subject to workers compensation laws in various jurisdictions pursuant to which
occupational injuries to, and diseases of, individual workers making claims are examined and
payments are awarded by a governmental board or agency. The expense of such awards is generally
funded by the employer, typically as a percentage of payroll costs within the jurisdiction of the
relevant board or agency, and is adjusted according to the experience with such claims either with
respect to employees of the particular employer alone or on the basis of all claims in respect of
employees in the same industry within the relevant jurisdiction. In 1994, the Occupational Disease Panel (ODP) of the Ontario Ministry of Labour (MOL)
concluded that there was a probable connection between miners lung cancer and all hardrock
mining. In 1996, the ODP asserted that a 1996 cancer morbidity study conducted by researchers at
McMaster University, using a large group of Ontario male nickel production workers from Inco and
Falconbridge, confirmed such a connection for nickel miners. Consequently, the ODP recommended
that primary lung cancer and the occupation of hardrock mining be categorized under a particular
schedule of the Ontario Workers Compensation Actwhich would create a presumption in favour of a
causal relationship for lung cancer claims unless the contrary could be proven. In 1997, the ODP
issued another report dealing specifically with laryngeal cancer and workers in nickel production.
This report relied heavily on the 1996 McMaster University study referred to above. The ODP
recommended that laryngeal cancer and certain nickel producing occupations be treated in the same
manner as lung cancer and hardrock mining. Inco retained independent medical and epidemiological
specialists to analyze these assertions and, as a result, made several submissions to the Workplace
Safety and Insurance Board (WSIB), the regulatory body of the MOL responsible for evaluating and
adjudicating workplace injuries and diseases, taking exception to the ODP recommendations,
primarily on the basis that tobacco smoking is likely a confounding factor, and to the validity of
the findings of both the original hardrock mining report and the McMaster University study. These
submissions explained why we believed that the ODP report was flawed and suggested that no policies
on this matter be established until more methodologically sound studies were conducted. Similar
submissions have been made by Falconbridge and by the Ontario Mining Association. Because of these
submissions, the WSIB has not taken any action on any of the ODP reports. In late 1994 the WSIB also revised and extended its policy with respect to lung cancer
compensation claims by nickel smelter and refinery workers. We objected to the process that was
used in considering the revised policy, which, in our opinion, failed to take into account
applicable scientific data, and we also objected to flaws in the policy itself. As a result of
submissions to, and discussions with, WSIB staff, in early 1998 the WSIB proposed a revision to the
1994 policy. However, this revision failed to address our central concerns with the policy and we
made additional written submissions to the WSIB suggesting further significant revisions. We have
continued our efforts to have the WSIB change this policy, but no changes have been forthcoming.
In mid-2001, we were invited to join a special stakeholder panel being formed by the WSIB. This
panel, called the Occupational Disease Advisory Panel (ODAP), consisted of industry and labour
representatives from a broad range of industrial sectors. The ODAPs mandate was to advise the
WSIB of criteria that should be applied in developing policies, to review contentious policies that
currently exist, and to recommend 61




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how the WSIB should deal with controversial studies previously conducted by the ODP. During
2003, it became apparent that the ODAP could not reach consensus on a number of important issues
and that a report from the ODAP was not possible. The ODAP Chair, who had been selected and
assigned this position by the WSIB, issued a draft report in early 2004 which attempted to relate
areas of agreement and disagreement of the ODAPs members. Inco provided comments on the draft
report as a member of the ODAP. The ODAP Chair then issued a final draft report in mid-2004 and
conducted public consultations in six cities across Ontario to obtain stakeholder input on that
draft report. Inco made additional presentations to the Chair at these consultations held in
Toronto and Sudbury in September 2004. It is expected that the Chairs final report will be
delivered to the WSIB in 2005, but we cannot predict what, if any, actions WSIB will take as a
result of this report. Worker Safety The table below shows the disabling injury frequency (DIF) for Inco in 2004, 2003 and 2002: 2004
    
    2003
    
    2002DIF
    
    
    1.4
    
    
    
    1.7
    
    
    
    1.8
 The DIF is calculated by Inco by multiplying the total number of disabling injuries in a year
that employees incurred as a result of work-related injuries by 200,000 hours (which is a constant
used by the Mines and Aggregates Safety and Health Association (Ontario) and other similar
organizations) and then dividing that product by the total number of hours worked by employees
during that year. The DIF disclosed above for 2002 is different from the previously disclosed DIF
for 2002 because the DIF for 2002 has been recalculated to reflect information that we received
subsequent to the previous disclosed DIF for 2002. Inco continues to pursue a goal of zero accidents. The implementation of the Integrated
Health, Safety and Environmental Management System, which is compatible with the OHSAS 18001
internationally accepted health and safety standard, emphasizes our commitment to improved safety
performance. 
 Regulation of Nickel and Other Nonferrous Metals Regulatory and non-governmental agencies in the United States, Canada and Europe have
proposed and, in certain instances, adopted regulations and other standards relating to
environmental releases of nickel, exposure to nickel in various forms, and management of
nickel-containing wastes, as summarized below. Occupational Exposure Limits (OELs) in Canada The ACGIH evaluates toxicological data and establishes a chemicals TLV, an airborne
concentration to which nearly all workers can be exposed for eight hours per day for five days per
week for their entire working life without suffering adverse health effects. Although the ACGIH
has no regulatory power, TLVs are commonly used as starting points for setting mandatory standards
for exposure to certain materials by regulatory authorities throughout the world and, in some
jurisdictions, are adopted more or less automatically. In November 1997, the ACGIH Board of
Directors approved new TLVs and carcinogen classifications for nickel and its compounds. These
classifications were published as adopted values in 1998. The new TLVs, which are to be measured
as nickel in inhalable particulate, were as follows: 1.5 mg/m3 for elemental/metallic
nickel; 0.2 mg/m3 for insoluble nickel compounds; and 0.1 mg/m3 for soluble
nickel compounds and nickel subsulphide (which forms during the metallurgical processing of Incos
nickel ores). The TLV for nickel carbonyl was unchanged at 0.05 ppm. Since 1998, insoluble nickel
compounds and nickel subsulphide have been classified by ACGIH as Confirmed Human Carcinogens;
soluble nickel compounds have been designated Not Classifiable as a Human Carcinogen; and
elemental nickel has been classified as Not Suspected as a Human Carcinogen. Nickel carbonyl was
not classified for carcinogenicity at all. The Province of Manitoba automatically adopts the ACGIHs TLVs as mandatory OELs, and it
adopted the TLVs for nickel as OELs in 1998. Between 1998 and 2002, our Manitoba operations
continued to use established sampling technology because routine samplers for inhalable particulate
were not available. However, all samples collected during this period were converted to an
inhalable basis using relevant research results. During this period, an analytical protocol
developed by Inco for determining soluble nickel, oxidic nickel, sulphidic nickel and elemental
nickel contents was used to determine the concentrations of nickel in samples for the four types of
nickel substances specified in the OEL. In 2002, sampling for types of nickel in the workplace was
completed using an inhalable IOM 7-hole sampling system and analyzed for nickel species using this
Inco-developed analytical protocol. As the analytical protocol cannot uniquely distinguish nickel
subsulphide from other nickel sulphide, additional assumptions about the presence of various
sulphides must be made using knowledge about the processes being used from which dust arises. As
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few groups of workers were found to exceed the OELs. Action plans were implemented to
mitigate such exposures in our surface processing plants. The success of these action plans was
evident by a significantly reduced number of individuals having exposures exceeding the OELs in
2003. The Province of Ontario does not automatically adopt the ACGIHs TLVs, and the MOL normally
consults stakeholders prior to setting OELs. In the case of nickel, these discussions started in
1999. By mid-2000 the MOL had stated that it intended to adopt OELs for only two of the four ACGIH
nickel TLVs, nickel subsulphide and insoluble nickel. The proposed OELs were numerically
equivalent to the TLVs, but were based on a so-called total dust sampler, currently used
extensively in Ontario, instead of an inhalable dust sampler. However, when the final regulation
was published in September 2000, the MOL chose to adopt all four of the ACGIH nickel TLVs as new
inhalable OELs. While our Ontario operations would have had relatively minor compliance problems
under total dust sampling, significant problems existed for inhalable sampling and inhalable
OELs, principally in the Ontario operations smelter, matte crushing and matte separation plants. In March 2001, a tripartite committee focusing on the review of inhalable levels of nickel,
made up of representatives of the MOL, Inco and several locals of the union that represents our
workers, was formed by the MOL to cooperatively review and consult on several new commercial
products for inhalable sampling which became available in 2001. A viable commercial sampler was
found to be workable in Incos workplace environments in May 2001. In October 2002, the tripartite
committee concluded its work with an agreement that the analytical technique that Inco adopted for
speciation, in conjunction with other analytical techniques necessary to identify the species, all
of which would be subject to the professional judgment of an expert in the field prior to
acceptance, was a reasonable approach for characterizing exposures to metallic nickel, insoluble
nickel, soluble nickel and nickel subsulphide in Inco workplaces. To meet the new OELs, a
four-year workplace environment improvement plan has been developed by Inco and reviewed with the
MOL. Approximately $5 million was committed in 2002 for ventilation improvements to be made over
the next few years. In 2003, approximately $1.6 million was spent on ventilation improvements
which resulted in decreases in airborne exposures. For example, in 2003 total nickel levels at
various locations in the matte processing area of the Copper Cliff Smelter decreased by 25 per cent
to 88 per cent. It is not possible to state at this time the full extent of the ventilation
improvement program or the total capital expenditures that will be necessary to comply with these
OELs at our Ontario operations. Inco and the MOL have agreed in principle to a long-term
cooperative approach of engineering control upgrades that will take place in a number of workplaces
over several years to meet these OELs. In 2001, the MOL released a discussion paper concerning a proposed permanent process for
up-dating OELs for all workplace substances. Four options for this process were proposed by the
MOL, which invited comments on these options from stakeholders. Inco joined other members of the
Ontario Mining Association in forming a task force aimed at considering the best process for
maintaining OELs that are protective of workers, supported by sound science, and economically
practical. The task force released its comments in February 2002. In the opinion of the task
force, none of the options suggested by the MOL were acceptable and it suggested a fifth option in
which an independent expert advisory group would review each candidate OEL for its scientific, as
well as practical, basis. There was no response from the MOL on this proposed option in 2003 and
no further action was taken by the MOL on these proposed options in 2004. We cannot predict the
effect that further reductions in OELs for workplace substances could
have on our results of operations or
financial condition. Ontario Air Standards The MOE issued a plan for updating its air quality standards for priority contaminants in 1996
and revised this plan in 1999. Certain elements, including nickel, arsenic, cadmium and chromium,
were identified as priority contaminants requiring review. The first step in setting new air
quality standards for each element is the release of the relevant scientific information and
possible approaches by which such information could be used in setting the standard. This
information is then made available for public review and comment. The MOE then releases its
rationale for setting a standard for each element, which is followed by a further comment period
for stakeholders. Finally, the MOE considers all comments and then issues its standard. In June
2004, the MOE announced its ultimate objective of replacing the present guidelines by incorporating
the new standards into the regulations under the Ontario Environmental Protection Actby June 2005. In June 2004, the MOE, through the issuance of draft information documents, sought input from
stakeholders on new ambient air regulations for nickel, arsenic, cadmium and chromium. In October
2004, Inco provided comments on all of these draft information documents aimed at improving the
accuracy and completeness of scientific literature and also commented on the strengths and
weaknesses of lines of evidence that could be used in developing numerical air standards for these
metals. Our comments on nickel were extensive and focused on the requirement to account for
speciation of nickel in air, to properly extrapolate occupational dose-response information to the
low doses expected in ambient air, and to suggest a new compelling method for deriving the specific 63




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respiratory cancer unit risk for oxidic nickel compounds, the use of which is essential
because oxidic nickel is the prevalent form of nickel in ambient air. We do not know how the MOE
will make use of our comments or what approach the MOE will employ to derive ambient air standards
for these metals. It is expected that MOE will issue a revised information document to continue
the stakeholder consultation process on these proposed ambient air standards in 2005. In addition to its activities in setting numerical standards for ambient air, the MOE has
issued an air dispersion modelling guideline update for stakeholder review. The MOE anticipates
that the current air dispersion modelling guideline would be improved at the same time as the new
air quality standards come into effect. Inco submitted comments in October 2004 on the changes to
the dispersion modelling guideline proposed by the MOE and emphasized (i) the need for assessing
compliance against annual average air concentrations where the toxicological end-point is based on
chronic health effects, as is done in many other jurisdictions, (ii) the need for ensuring that
standards appropriately reflect true risk, and (iii) that the initiatives designed to improve air
quality be sufficiently flexible so that a broad array of corrective strategies could be evaluated
and implemented. Occupational Exposure Limits (OELs) in the U.S. and the U.K. Inco is generally in compliance with the permissible exposure limits for all forms of nickel
that are currently applied by the U.S. and U.K. governments. The U.K. OELs are currently divided into two categories: maximum exposure limits (MELs)
which are ceiling values that must not be exceeded, and occupational exposure standards (OESs)
which are safe working levels. In 2004, there were no OESs for nickel and the MELs for nickel
remained unchanged at 0.1 mg/m3 for soluble nickel and 0.5 mg/m3 for
insoluble nickel. However, as of April 2005, MELs and OESs will be replaced with a single standard
called workplace exposure limits (WELs). Like both MELs and OESs, WELs are time-weighted average
exposure limits, but also include new requirements to strictly observe principles of good practice
for the control of exposures to ensure that the WELs are not exceeded. The change to WELs will
result in an increased obligation on Inco to demonstrate the use of the best available practices to
minimize workplace exposures to nickel. The U.K. Health and Safety Executive is reviewing these
limits, but consultation with the government indicates that the WELs for nickel are not likely to
be changed in the near future from the current MELs for nickel. We do not anticipate that meeting
the new WELs for nickel will have a material adverse affect on our operations. In late 2004, the U.S. Occupational Safety and Health Administration (OSHA) proposed a very
stringent eight-hour time-weighted average permissible exposure limit (PEL) of one microgram
hexavalent chromium per cubic metre. If the PEL is adopted as proposed, it could have an adverse
impact on various U.S. industrial sectors (such as stainless steel producers and electroplaters)
that are major users of nickel. We cannot predict whether this PEL will be adopted by OSHA or, if
it is adopted, what impact it will have on nickel users in the U.S.
and, indirectly, on our results of operations or financial condition. U.S. Environmental Regulatory Actions In 1990, the United States Congress amended the U.S. Clean Air Actto require, among other
things, that 189 chemicals or chemical groups (including nickel compounds) be regulated as
hazardous air pollutants (HAPs). Pursuant to this legislation, EPA has been promulgating
stringent technology-based standards for controlling emissions of HAPs from designated major
source categories. This process will continue in the future and ultimately may include the
promulgation of additional risk-based standards. Some of these standards may limit emissions of
nickel and its compounds, most likely through limits on overall emissions of particulate matter.
While it does not appear that the major source HAP control program will target emissions at
nickel producing or using industries, it is possible that some nickel-emitting sources may
ultimately be covered by such standards. We are unable to predict what capital expenditures or
operating cost increases Inco or its customers may incur if that proves to be the case. In July 1999, EPA issued its final Integrated Urban Air Toxics Strategy under which 33 HAPs
judged to pose the greatest threat to public health in urban areas are to be targeted for future
regulation. Nickel compounds were among the 33 HAPs listed under this strategy. As a result,
nickel compounds will be included by EPA in periodic National Air Toxics Assessments (NATAs)
designed to estimate and track trends in emissions, ambient air concentrations, population
exposures, and associated characterizations of risk. In June 2002, EPA released the Final
National-Scale Air Toxics Assessment for 1996 (NATA-1996), which estimates emissions, ambient air
concentrations, and population exposures for the 33 HAPs referred to above based on a 1996
emissions inventory, and characterizes the resulting population risks on a national and regional
basis. This assessment reflected much lower total national emissions of nickel compounds than an
earlier estimate that was based on information for 1990. NATA-1996 found that concentrations of
nickel compounds in the ambient air were not of concern with respect to non-cancer health effects.
However, nickel compounds were characterized as being a more significant contributor to potential
cancer risks. That finding was based on what Inco 64




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and other nickel producers believe to be a flawed methodology for estimating potential cancer
risk. The nickel industry made a submission to EPA, asking that the methodology be corrected, so
that a more appropriate risk characterization can be made in the next release of NATA information,
which is scheduled at three-year intervals. In addition to issuing NATAs, EPAs Urban Air Toxics Strategy will target various area
sources of hazardous air pollutants for further emissions reductions. In the case of nickel
compounds, some of these sources are likely to be fossil fuel combustion units, while others may
involve nickel-producing or using industries such as stainless steel manufacturing, metal
electroplating and secondary nonferrous metals. Currently, EPA is developing an area source
emissions standard for secondary nonferrous metals facilities that presumably would apply to
Inmetco. This standard is unlikely to be issued before 2007, if it is issued at all, and we do not
know what its coverage will be or what emission limits it will establish. We are unable to predict
what impact, if any, the inclusion of nickel compounds on EPAs list of Urban Air Toxics (and the
related assessments and area source standards) might have on nickel users and, both directly and
indirectly, on our operations or financial condition. In December 2002, the National Toxicology Program (NTP) within the U.S. Department of Health
and Human Services released its Tenth Report on Carcinogens (ROC). In these bi-annual reports,
NTP lists various substances that it concludes are either known to be human carcinogens or
reasonably anticipated to be human carcinogens. Previous versions of the ROC listed metallic
nickel and certain nickel compounds as reasonably anticipated to be human carcinogens.
Metallic nickel remained in that category in the Tenth ROC. However, nickel compounds as a class
(with no differentiation) were listed as known to be human carcinogens. That broad listing runs
counter to arguments that Inco and other nickel producers had made to NTP over the years, and we
continue to believe it is not scientifically justified for various types of nickel compounds.
Since nickel compounds already had been characterized as carcinogenic to humans by the
International Agency for Research on Cancer, it is not clear what additional impact, if any, NTPs
listing of nickel compounds as known to be human carcinogens in the Tenth ROC will have on
businesses that produce, use, handle, or otherwise manage nickel compounds and wastes in which they
are contained. Similarly, since metallic nickel has been listed as reasonably anticipated to be a
human carcinogen by the NTP for many years, it is not clear what effect, if any, the reaffirmation
of that listing in the Tenth ROC will have. Nickel alloys, stainless steels and other alloys that
contain nickel, also were evaluated for possible listing in the Tenth ROC, but after all the
evidence was considered, they were not included as either reasonably anticipated or known to be
human carcinogens. Following publication of the Tenth ROC, Inco, in conjunction with nickel
producer associations, formally requested that NTP correct certain information in the Tenth ROC
regarding nickel metal and nickel compounds. That request was rejected in late 2003. However,
following an appeal, NTP made some changes to correct some of this information in the discussion of
nickel and nickel compounds in the Eleventh ROC, which was released in January 2005. While these
changes did not alter the carcinogenic listings of metallic nickel and nickel compounds made in the
Tenth ROC, the existence of these NTP listings is not expected to have a material adverse effect on
our results of operations or financial condition. In December 2002, EPA adopted sweeping amendments to its Inventory Update Rule (IUR
Amendments) implementing provisions of the U.S. Toxic Substances Control Act. The IUR program
requires manufacturers and importers of covered chemical substances to submit quadrennial reports
of specified information if they produce or import more than a designated amount of a covered
chemical at any one site. Prior to the adoption of the IUR Amendments, inorganic chemical
substances (like nickel and its compounds) had been exempt from IUR reporting. The IUR Amendments
removed that exemption so that inorganic chemicals will be subject to the IUR program in the next
reporting cycle, covering 2005. While the basic reporting threshold has been increased from 10,000
pounds per site to 25,000 pounds per site, the information required to be reported has been
dramatically expanded, particularly for sites that produce or import more than 300,000 pounds of a
covered chemical during the reporting year. The new processing and use information required in
those cases will be burdensome to collect and report; however, this expanded requirement to report
processing and use information will not apply to inorganic chemicals like nickel until the 2010
reporting year. While the new IUR reporting requirements will impose additional costs and burdens
on Inco and various of its U.S. customers, they are not expected to have a material adverse effect
on our results of operations or financial condition. Canadian Environmental Protection Act In 1994, under CEPA, two federal government departments, Environment Canada and Health Canada,
published toxicity assessments of 17 substances, including nickel and its compounds. The
assessment concluded that metallic nickel was not considered toxic under CEPA. However, oxidic,
sulphidic and soluble compounds of nickel were considered toxic, according to statutory definitions
and criteria. As a result of this assessment, together with CEPA toxic classifications for
mercury, lead, and certain compounds of arsenic and cadmium, a base metal smelter Strategic Options
Process (SOP) was conducted in 1997 with the result that the industrial sector committed to
develop site-specific environmental management plans and reduce sector-wide releases of arsenic,
cadmium, lead, mercury and nickel by 80 per cent from 1988 (as the base year) to 2008. 65




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In 1999, a revised CEPA was enacted and has been viewed as granting increased authority to,
and mandating increased attention by, federal departments in data collection, pollution prevention
and other regulatory actions. As a result of the revised CEPA, Environment Canada has initiated
several additional programs. One has been to review the progress being made under the original
base metal smelter commitments made as part of SOP and possibly accelerating their implementation.
Another program has been to take action regarding substances known to be toxic under CEPA,
including emissions of dioxins and furans, sulphur dioxide and particulate matter. Inco is part of
the industry group interacting with Environment Canada on these programs. During 2003, this group
examined the options for regulations that might be employed under CEPA to control substances listed
as toxic. Presently, pollution prevention plans and a code of practice for base metal smelters are
under active debate at a multi-stakeholder level, with a view to using this as the basis for the
regulation of toxic substances under CEPA. Another CEPA-related program seeks to categorize and prioritize all substances on the Domestic
Substances List (the DSL), a list of more than 20,000 substances which are permitted to be
produced in or imported into Canada. New substances that are not on the list are required to
undergo a pre-manufacturing appraisal in order to be added to the list. Environment Canada has
elected to apply criteria for this process that we believe are inappropriate for inorganic
substances. These criteria were originally developed for synthetic organic chemicals and involve
assessments of persistence, bioaccumulation and toxicity. In 2001, an expert advisory group,
including a consultant representing the Mining Association of Canada, was organized by Environment
Canada for the purpose of reviewing the scientific validity of using persistent, bioaccumulative
and toxic (PBT) criteria for inorganic substances. In late 2001, this group issued its findings
and recommendation to Environment Canada. This group concluded that the persistent,
bioaccumulative criteria do not properly categorize metals and other inorganic substances.
However, recognizing that the use of PBT criteria is legislated, the group recommended that all
inorganic substances should be considered as persistent for the purposes of this categorization,
and that toxicity alone should be the criterion by which inorganic substances should be
categorized. In June 2002, Health Canada made a proposal for categorizing human exposure to
substances on the DSL on the basis of use and on the basis of industry codes originally attached to
substances when they were placed on the list. Discussions on this proposal continued through 2004
and we cannot at this time identify or predict what additional operating or capital expenditures
will be required by Inco to meet the ultimate regulations that may result from these and other
possible CEPA-based and Environment Canada programs and what effect they would have on our
operations. California Regulatory Actions In 1991, the California Air Resources Board (CARB) identified nickel and its compounds as a
toxic air contaminant. A series of guidelines were then issued for assessing risks of
non-occupational exposure, and acute and chronic reference exposure levels (RELs) were proposed
along with a cancer potency factor for nickel compounds. Because Inco and other nickel producers
believed that the guidelines and RELs were not well-founded scientifically and might lead to
unjustifiable controls being placed on users of nickel in California and elsewhere, Inco and other
nickel producers made submissions criticizing the methods used by CARB in developing the RELs. In
February 2000, California adopted final RELs. Although the final RELs represent an improvement
over the initial proposals, we believe that they are still unjustifiably low. Although the RELs do
not appear to have had a significant impact on nickel users in California, we are unable to predict
at this time what long-term impact the RELs will have in California or, indirectly, in other
jurisdictions in which nickel is produced or used. In June 2003, the California Office of Environmental Health Hazard Assessment proposed a
Child-Specific Reference Dose (CSRD) for nickel to be used in school site risk assessments.
Nickel producer associations of which Inco is a member submitted comments questioning the
scientific basis for the proposed CSRD and arguing that it should be at least five times higher.
The California Office of Environmental Health Hazard Assessment has not yet taken final action on
the proposal, which is awaiting the completion of external peer review. However, we do not believe
that the CSRD, even if adopted as proposed, would have a material
adverse impact on its results of operations or financial condition. Late in 1999, the California Office of Environmental Health Hazard Assessment proposed a
public health goal (PHG) of one microgram of nickel per litre of drinking water. In conjunction
with other nickel producers, Inco submitted comments arguing that this proposal was scientifically
unjustified. In August 2001, a final PHG of 12 micrograms of nickel per litre of drinking water
was adopted by the California authorities. Although not itself a mandatory standard, this goal
presumably will serve as a benchmark for setting a drinking water standard in California. This
goal could also affect the perception of the health risks associated with nickel by producers and
users of nickel-containing products. In addition, this PHG may have an impact on EPAs
consideration of a future drinking water standard for nickel. 66




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Right-to-Know Legislation Right-to-Know and other reporting laws have been adopted in many jurisdictions in which we
operate. These laws generally require employers to advise their workers and their local
communities, as well as specified governmental authorities, of the kinds and amounts of specified
chemicals, including some chemicals made or used by Inco, which may be present in the workplace,
released to the environment, or sent to a recycling or waste management unit, and to develop
emergency response programs. Compliance with these Right-to-Know requirements has had no
material effect on our results of operations or financial condition. Harmonization of Classification and Labeling of Chemicals In 1990, the International Labour Organization (ILO) initiated a project to harmonize
existing systems for the classification and labeling of chemicals. This goal was endorsed by the
1992 UN Conference on Environment and Development (UNCED) and was included as one of the six
areas for action identified in Chapter 19 of Agenda 21 of UNCED on the environmentally sound
management of toxic chemicals. UNCED recommended that a globally harmonized hazard classification
and compatible labeling system, including material safety data sheets (MSDSs) and easily
understandable symbols, should be available, if feasible, by the year 2000. In September 2001, a
Harmonized Integrated Hazard Classification System for Chemical Substances and Mixtures was
approved by the ILOs Task Force on Harmonization of Classification and Labeling and endorsed by
the OECDs Joint Meeting of the Chemicals Committee and Working Party on Chemicals, Pesticides and
Biotechnology. This document and similar documents on Physical Hazard Classification and Hazard
Communication Tools were merged to form the Globally Harmonized System (GHS). The GHS was
adopted by the UN Subcommittee of Experts on the GHS on the Classification and Labeling of
Chemicals and the UN Committee of Experts on the Transport of Dangerous Goods and the GHS in
December 2002. Although adoption of the GHS continues to be considered voluntary, the goal of the
Intergovernmental Forum on Chemical Safety, endorsed at the September 2002 World Summit on
Sustainable Development is to have as many countries as possible implement the GHS by 2008. In
addition, the Asia-Pacific Economic Cooperation (APEC) is recommending the GHS be adopted, on a
voluntary basis, by 2006, and Australia has committed to adopting the GHS by 2006. The countries
that are signatories to the North American Free Trade Agreement (Canada, the United States and
Mexico) have committed to review their internal systems and consider adopting the GHS. It is
expected that Canada will adopt the GHS by 2008. Inco does not believe that the adoption of the
GHS will have a material impact on its results of operations or financial condition. European Union Actions There are several key areas under discussion at the European Commission concerning nickel in
respect of workplace legislation, public health and consumer product legislation, and environmental
legislation. In 2004, ten new member states joined the European Union (EU) and there was an
election of members to the European Parliament in each member state. It is not known what impact
these changes to the EU membership may have on the EU legislative process, but we believe that
there will be changes in the area of policy development as a result of the increase in EU
membership. In late October 2003, the European Commission adopted the draft legislative text of a new
chemical policy (the NCP) for the EU which, if it ultimately becomes law, will supersede some 30
pieces of current EU legislation. The legislation, which still must be debated and approved by the
European Parliament and adopted by the European Council before it can take effect, is not expected
to come into force before the end of 2006 at the earliest. The new policy, referred to as REACH
(for registration, evaluation, and authorization of chemicals), would place more responsibility on
companies to test exhaustively for all hazards, register and secure regulatory approval as a
condition for placing on the EU market or importing chemicals into the EU. The registration
requirements would also be triggered by the tonnage of certain substances to be placed on the EU
market or imported into the EU. The evaluation process would be triggered by the EU authorities.
In addition, authorizations would be required for chemicals of high concern, including those which
are classified as category 1 or 2 carcinogens, mutagens, or reproductive toxicants and those
compounds with an organic component classified as persistent, bioaccumulative and toxic in the
environment. In effect, the REACH system would require producers/importers of such chemicals to
obtain a permit to market them based on their use patterns. It is unknown whether the European
Parliament will approve the REACH program as adopted by the European Commission or if amendments
will be tabled. As approved by the European Commission, REACH applies to ores, concentrates and
intermediates of the mining and metals industries, while exempting comparable materials from the
organic compound product chain. It also applies to massive forms of metals and their alloys, which
may be less hazardous to human health and the environment. The concerns of the metals industry are
being tabled through a metals forum group made up of Eurometaux (the non-ferrous metals producers
association in the EU), Eurofer (the iron and steel producers association in the EU), and
Euroalliages (the alloys producers association in the EU). A socio-economic study, looking at
business consequences of the proposed NCP, is under way to assess its potential impact on these
sectors. Industry 67




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may incur significant costs for administration and implementation, as well as research funding
if the NCP is adopted in its present form. EU Regulation 793/93(EEC), the so-called existing substances regulation, is concerned with
the evaluation of the risks of and controls for existing substances. Five nickel substances were
listed for review under this regulation. Inco believes that this is the single most comprehensive
legislative review of nickel in respect of human health, public health, consumer health and the
environment that has been undertaken by a governmental authority worldwide. This legally driven
initiative started in 1996, when Denmark, allegedly concerned about the ability of nickel to cause
dermal sensitization, placed elemental nickel and nickel sulphate on the third priority substances
list developed by the European Commission. In 1996, the Danish Environmental Protection Agency
(the Danish EPA) was appointed the principal agency for conducting risk assessments on these
substances. In 2000, three additional nickel compounds, nickel carbonate, nickel chloride and
nickel dinitrate, were added to the risk assessment program as part of another priority substances
list developed by the European Commission. These nickel risk assessments have progressed slowly due, in part, to the rapidly changing
methodologies for assessing the environmental risks of metals in general. The nickel industry has
been successful in demonstrating that further research and testing is required for a scientifically
credible environmental risk assessment of nickel. A formal research program has been agreed with
the European Commission for this work, with an anticipated completion date of mid-2005. At that
stage, the technical debate on safe levels of nickel in all of the environmental compartments
(soils, water and sediment) will resume. The scientific aspects of the health risk assessments of
the five nickel substances (nickel sulphate, nickel chloride, nickel nitrate, nickel carbonate and
nickel metal) are also likely to be completed in 2005. Any recommendations for increased risk
reduction measures beyond those currently in place will be passed to the relevant EU policy
committees for their consideration after a formal peer review process by the European Commission. In the area of health risk assessment, the classification of soluble nickel compounds was
referred to the specialized experts group (the SEG) of the European Commissions working group on
classification, which agreed with the Danish EPA that all soluble nickel compounds should be
classified as category 1 carcinogens, i.e. known human carcinogens. This change is scheduled to be
implemented by changes to the EU classification and labeling directive in April 2005. This change
could have a material adverse effect on the sale of nickel sulphate and nickel chloride in Europe. In October 2004, the EU classification committee determined that soluble nickel compounds
should be classified as a category 2 reproductive toxicants under the EU classification system.
Such a classification means that soluble nickel compounds would be subject to authorization under
the REACH program described above. Soluble nickel compounds also received new classifications for
(i) acute toxicity orally, (ii) acute toxicity by inhalation (nickel chloride), (iii) causing
chronic toxicity by inhalation, (iv) skin and eye irritant and (v) dangerous to the environment.
Also, nickel metal compounds received a new hazard classification for chronic lung toxicity. In December 2004, the Danish EPA released its latest draft report concerning risk
characterization of nickel compounds as part of the risk assessment process. This draft report is
currently being reviewed by industry and member state experts and will likely be revised and
finalized in late 2005. It is anticipated that OELs for both metallic nickel and nickel compounds
may be lowered as a result of new information in this report. The data to support the proposal to
lower nickel OELs are also being reviewed by the European Commissions scientific committee on
occupational exposure limits (SCOEL), which has been considering nickel occupational exposure
limits for several years. A criteria document on occupational exposure limits for nickel which was
prepared by independent experts was presented to SCOEL in 1997 by the European Nickel Group, an
association whose members include most of the EUs nickel producers and importers. Further
information was subsequently submitted as part of the risk assessment process. SCOEL will be
reviewing the new information in 2005 and may recommend new OELs for nickel and nickel compounds.
We cannot predict at this time if the OELs for metallic nickel and nickel compounds will be lowered
and, if they are, whether this action would have a material adverse
effect on our results of operations or
financial condition. At this time it is not known what impact the Danish EPA and other risk assessments associated
with various forms of nickel will have on our operations or those of our customers. A
socio-economic and technical feasibility study on these risk assessments is being undertaken by the
European Nickel Group and is expected to be available in 2005. The draft nickel risk assessment
recognizes the need to consider economic and technical feasibility information to be provided by
the nickel industry. Further studies on dermal exposure in workplaces have also been suggested as
part of the nickel risk assessment. The European Nickel Group risk assessment team, to which Inco
personnel belong, is working closely with the European Commission and the Danish EPA on the nickel
risk assessments. 68




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The European Commissions Directive Relating to Arsenic, Cadmium, Mercury, Nickel and
Polycyclic Hydrocarbons in Ambient Air is aimed at controlling these substances in ambient air.
The Directive, which was published in January 2005 and came into effect in February 2005, includes
a target limit value for nickel of 20 nanograms per cubic metre for atmospheric nickel. As a
result of submissions by industry groups during the development of the Directive, the limits are
target values, rather than binding limits, and control measures are not required to go beyond the
best available technology or to require that disproportionate costs be incurred to achieve the
target values. Although the target values adopted in the Directive are not binding limits, member
states have the right to enforce them as binding limits. The monitoring of atmospheric nickel is
currently the responsibility of member states. However, there is concern that this task will be
imposed directly upon industry, which is making representations to prevent that from happening. We
are currently evaluating the impact of the Directive on our Clydach refinery and cannot predict
whether it will have any significant adverse effect on the operation of this facility. The European Commissions Water Framework Directive, which regulates water quality standards
in the EU, listed nickel as one of the priority substances of concern and indicated that nickel may
be subject to discharge control measures that are more stringent than those currently in effect.
It is not yet known what the EU nickel water quality standards will be or what will be the
consequences to industries producing or using nickel in the EU. However, as part of the
implementation of this Directive, member states will initially have to classify both surface and
groundwater bodies. Any failure to meet a water quality standard within a portion of a water body
will result in the entire water body being classified as not in compliance. It is expected that
water body classification will be undertaken over a three-year timeframe. Several directives related to the end-of-life of certain consumer products have been finalized
and are being implemented in the EU. These include end-of-life for vehicles, waste electrical and
electronic equipment, restrictions on the use of hazardous substances in electrical and electronic
equipment, and the revised Directive on Batteries and Accumulators Containing Certain Dangerous
Substances. As approved by the EU Council of Environment Ministers late in 2004, this Directive
would ban the use of cadmium in most consumer batteries (including nickel-cadmium batteries), with
an exception for power tools, medical equipment, and emergency lighting and alarm systems to be
reviewed in four years. In addition, battery recycling targets would be established for EU member
states. This Directive must be approved by the European Parliament, which we currently understand
will be considering it in 2005. In 2004, the EU Marketing Restrictions and Use Directive was amended. This Directive
regulates the use of nickel in articles in direct and prolonged contact with skin, such as
jewellery. The 2004 amendment specifically addressed pierced jewellery, setting a more reliable
and scientific nickel ion release rate limit rather than a nickel content limit. The Nickel
Institute is closely following research on various aspects of nickel contact dermatitis. The Seveso II Directive recently reissued by the European Commission is concerned with
preventing major accidents and releases of hazardous materials at industrial installations.
Industrial installations that store or produce certain tonnages of hazardous substances listed in
the Seveso II Directive must make a safety report to their local authorities and obtain a permit
for operation. There are two tiers of requirements under the Seveso II Directive, lower tier and
upper tier. The changes relate only to lower tier operations and do not affect Incos Clydach
operations as those operations fall within the upper tier due to the nature and quantity of
Clydachs nickel oxide inventories. Inco is working with its European nickel oxide customers to
ensure that they are in compliance with this Directive. To comply with pollution control regulations in the U.K., Incos refineries at Clydach, Wales
and Acton, England have obtained the necessary authorizations to continue to operate. These
authorizations include prescribed emission release limits and are conditional upon Inco carrying
out certain environmental improvements. In order to achieve continuous improvement, the government
reviews these authorizations at least every four years, at which time new environmental improvement
conditions may be established. In late 2001 and early 2002, these authorizations were resubmitted
to the relevant governmental authorities as required under the new EU Integrated Pollution
Prevention and Control Directive. Both refineries have been issued with the necessary
authorizations and continue to meet their specified improvement conditions, none of which are
expected to have an adverse effect on operations. The improvement program is being managed using
the refineries ISO 14001 certifications. WHO Drinking Water Guidelines The World Health Organization (WHO) periodically reviews its guideline values for
contaminants in drinking water. Its most recent review of nickel in drinking water began in 1995.
Over the past several years nickel producers organizations, including NiPERA, made submissions to
the WHO concerning the most appropriate method for extrapolating animal test data to humans. The
WHO recommended a very stringent guideline value of 20 micrograms of nickel per litre of drinking
water. This value was disputed by the nickel industry and, in 1997, the WHO designated the value
as provisional. In 2000, a new study on the reproductive effects of ingested nickel in animals
was completed. This study, which was funded by the nickel industry, provides an improved
scientific 69




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basis for setting a nickel guideline level for drinking water and was submitted to the WHO for
its consideration. Based on its interpretation of that study, the WHO, in July 2004, revised its
guideline value to 30 micrograms of nickel per litre of drinking water. While WHO is not a
regulatory body itself, the WHO guideline values influence governmental regulatory agencies around
the world in adopting standards. We cannot to predict what effect WHOs revised guideline level
for nickel in drinking water will have in specific jurisdictions, including Canada, or what impact
it will have on our results of operations or financial condition. 
 Other Environmental Control Regulations Inco and other mining companies in Canada are aware of and concerned about the increasing
desire on the part of many regulatory authorities throughout the world to limit the mining,
refining and use of metals in the future. This desire is based on the belief of governments in the
changing expectations of society towards various approaches to the concept of sustainable
development, a concept that has been defined by regulatory and other bodies differently but, at a
minimum, appears to focus on meeting the needs of the present without compromising the ability of
future generations to meet their own needs. In response to this view, Inco believes that there is
a tendency for some governments to use inadequate or incorrect information, to rely on
inappropriate methodologies, and to apply the so-called precautionary principle in an unwarranted
manner in making regulatory decisions regarding metals. An example of this approach is the
predisposition by some regulators to identify metals, including nickel, as PBT chemicals that
should be targeted for use reduction or waste minimization. In 1998, EPA published a draft list of 53 chemicals or groups of chemicals described as PBT
substances that were to be the focus of a voluntary waste minimization initiative. Eleven of the
53 chemicals on the list were metals, including nickel. The inclusion of nickel on this list, if
finalized, could have led to increased regulation of nickel, placing additional burdens on
customers and users of nickel and possibly resulting in the substitution of other products for
nickel. In submissions made to EPA, Inco pointed out that the scoring and ranking scheme used to
develop this list does not, on a scientific and technical basis, properly apply to metals, so that
nickel should be removed from the list. Similarly, at an expert workshop conducted under the joint
sponsorship of EPA and other organizations in January 2000, the prevailing view was that PBT
criteria, which were developed to evaluate potential environmental hazards of organic chemicals,
could not appropriately be applied to metals and inorganic metal compounds. These views apparently
had some effect. In the summer of 2002, EPA released the final version of what is now referred to
as the Waste Minimization Priority Chemicals List. Only three metals, cadmium, lead and mercury,
are included on the list, and they were selected for reasons that do not involve a PBT
determination. For the last three years, EPA has been engaged in developing a comprehensive cross-agency
Framework for Metals Risk Assessment (the Framework) that will set forth principles for EPA
programs to use in assessing the hazards and risks of metals and inorganic metal compounds. As
part of the process, EPA commissioned a series of issue papers addressing various questions
relating to the hazard assessment of metals. These issue papers, prepared by independent experts
under contract to EPA, emphasized the complexity of evaluating the hazard potential of metals and
questioned the scientific basis for applying to metals the same PBT criteria that EPA uses to
evaluate the hazards of organic compounds. In late 2004, a revised draft of the Framework (based
in large part on the issue papers) was released for public comment and peer review by EPAs
Science Advisory Board. The peer review, which is to take place early in 2005, is expected to
result in some criticism of the issue papers and the draft Framework. We currently believe that
this may delay preparation of the final Framework, but it is possible that the Framework may be
issued by the end of 2005. Based on the current draft, it is anticipated that the final Framework
will establish a much more scientifically sound basis for evaluating the potential hazards and
risks of metals than has been the case when EPAs PBT methodology was employed. In the future, as in the past, various supranational, national, provincial, state and local
governments and authorities under which Inco operates may impose regulations covering the emission
of air pollutants, the discharge of process wastewater and the generation, storage, treatment and
disposal of liquid and solid wastes that could apply to various of our operations and that could
impose additional compliance costs on the affected Inco operating entities or on nickel-using
industries. Certain of the proposed regulations discussed above, if enacted without change, would
impose costs and/or require changes in our operations that would materially affect our results of
operations and/or financial condition. Reference is made to the discussion of future removal and
site restoration costs and related plans under Future Removal and Site Restoration; Closure and
Post-Closure Plans above. 70




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Employees At December 31, 2004, Inco had 10,973 employees, compared with 10,478 employees at
year-end 2003 and 10,534 employees at year-end 2002. At year-end 2004, 6,419 of our employees were
located in Canada, 162 in the United States, 391 in the United Kingdom, 3,320 in Indonesia, 351 in
China, 189 in New Caledonia and 141 in other countries. Most full-time employees participate in
Incos performance through profit-sharing or other bonus arrangements. New collective agreements with unionized hourly production and maintenance workers at our
Ontario operations were entered into on August 29, 2003 and will expire on May 31, 2006. These
agreements were reached following a three-month strike that had a material adverse effect on our
2003 production of nickel, copper and certain other metals and our results of operations, financial
condition, profitability and cash flow from operations for 2003. A three-year collective agreement
with our unionized office, clerical and technical employees at our Ontario operations was
negotiated in the first quarter of 2004 and remains in effect until March 31, 2007. On September
15, 2002, a three-year collective agreement with our unionized workers at our Manitoba operations
was successfully negotiated. That agreement expires on September 15, 2005. We cannot predict at
this time whether we will be able to enter into a new collective agreement covering our Manitoba
operations without a labour disruption when the current agreement expires. PT Inco entered into a
new two-year collective labour agreement with its union in the fourth quarter of 2004 which expires
on December 31, 2006. At Goro, we currently have two unions representing some of our employees.
In early September 2002, Goro experienced labour disruptions by personnel associated with certain
project construction subcontractors. As a result of these disruptions, the decision was made in
late September 2002 to curtail certain activities at the projects site to enable Goro Nickel,
contractors, subcontractors and other interested parties to develop procedures to avoid future
disruptions. A number of procedures were put in place prior to the start of the Goro project
comprehensive review in late 2002 and over the past two years we have been seeking to complete the
implementation of these and other procedures as part of the negotiation of labour, site or other
accords to help minimize any such disruptions in the future. Through an employers association, of
which we are the controlling member, we negotiated a collective agreement effective September 2002
covering the construction of the first phase of the Voiseys Bay project. 
 Miscellaneous Investments In connection with the disposition of the battery and related products businesses
conducted by Inco ElectroEnergy Corporation (IEEC), which was completed in 1983, Inco assumed
responsibilities for certain expenditures and other costs associated with certain proceedings or
administrative actions initiated by or involving EPA or state environmental agencies concerning
certain facilities operated by these businesses. We also assumed responsibility for compliance by
these facilities with applicable local environmental regulations covering the treatment or
discharge of certain wastewaters, compounds or effluents into publicly-owned treatment works,
sewage systems, groundwater resources and watercourses and the related cleanup of deposits of
certain minerals and compounds from such watercourses. Our total accounting reserve relating to
these remaining responsibilities, which reflects their estimated cost, was $30 million at year-end
2004, based on cost estimates developed during 2003 and updated during 2004 associated with
remediation plans for two former industrial sites in the United States, compared with $30 million
at year-end 2003 and $7 million at year-end 2002. 
 Exmibal On December 15, 2004, Inco completed the sale of its 70 per cent interest in its
Guatemalan subsidiary, Exploraciones y Explotaciones Mineras Izabal, S.A. (Exmibal), to Skye
Resources Inc. (Skye Resources) pursuant to an agreement entered into between Inco and Skye
Resources on September 30, 2004. Under this agreement, Inco acquired 13.93 per cent of the common
shares of Skye Resources. This interest may through the issuance of
additional shares by Skye Resources, depending upon the amount of
future financings raised by Skye
Resources, increase up to 17.5 per cent if Skye Resources exercises its option to acquire Incos
100 per cent interest in two other Guatemalan subsidiaries related to the mothballed Exmibal
project at any time before late 2009 and we exercise certain
pre-emptive rights we have. Exmibals mining and processing facilities have been
mothballed since 1982. 
 Other Information In addition to properties discussed under Description of Business above, certain of
Incos sales offices are leased and the Company also leases office space in Toronto, Ontario;
London, England; Saddle Brook, New Jersey; and in certain other locations around the world. Operations in certain foreign countries involve certain risks, including risks of monetary
instability, changes in exchange rates, 71




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inconvertibility of currencies and expropriation and nationalization. For example, Indonesia
experienced a significant devaluation of its currency and other economic issues in recent years and
the uncertain political situation in Indonesia, primarily the result of the economic, social and
political issues facing that country, could adversely affect PT Incos ability to operate and,
accordingly, our results of operations, financial condition and prospects. For further information
on the political situation in Indonesia, see PT International Nickel Indonesia Tbk  General
above. For financial information by geographic location, see Note 20 to the financial statements
under Item 8 of this Report. 
 Shareholder Rights Plan Incos current shareholder rights plan is set out in a Rights Plan Agreement, as amended
and restated as noted below, entered into between Inco and CIBC Mellon Trust Company, as Rights
Agent, and is designed to (i) encourage the fair and equal treatment of shareholders in connection
with any bid for control of Inco by providing them with more time than the minimum statutory period
during which such bid must remain open in order to fully consider their options, and (ii) provide
Incos Board of Directors with additional time, if appropriate, to pursue other alternatives to
maximize shareholder value. The plan was initially approved by Incos Board of Directors in September 1998 and became
effective in October 1998. It was amended in certain respects by Incos Board of Directors in
February 1999 to ensure that it was consistent with rights plans which had been recently adopted by
other Canadian companies. The amended plan was approved by the shareholders at our 1999 Annual and
Special Meeting of Shareholders in April 1999. In February 2002, Incos Board of Directors
approved certain minor amendments to the plan to ensure that its terms remained consistent with
other rights plans in Canada and unanimously recommended that the plan, as proposed to be amended,
be reconfirmed, as amended and restated, by the shareholders. Such reconfirmation by the
shareholders was obtained at our Annual and Special Meeting of Shareholders in April 2002. The
plan remains in effect until October 2008 subject to reconfirmation by holders of Incos voting
securities at our Annual and Special Meeting of Shareholders on April 20, 2005. Incos Board of
Directors has proposed certain minor amendments to the plan as part of its approval in February
2005 that the plan be reconfirmed by our shareholders. The rights issued under the plan are attached to and trade with Incos Common Shares and no
separate certificates will be issued unless an event triggering these rights occurs. Certificates
evidencing Common Shares will be legended to reflect that they evidence the rights until the
Separation Time (as defined below). Holders of Incos Convertible Debentures, Subordinated
Convertible Debentures and LYON Notes (as those terms are defined in Note 15 to the financial
statements under Item 8 of this Report) and the certificates of entitlement attached thereto (which
entitle their holders to receive rights in the event that the related security is converted into
Common Shares) will generally be entitled to receive, upon conversion of the relevant security and
presentment of the certificate of entitlement, respectively, rights in an amount equal to the
number of Common Shares issued upon conversion of such securities. The rights will separate from the Common Shares and be transferable, trade separately from the
Common Shares and become exercisable at the time (the Separation Time) when a person acquires, or
announces its intention to acquire, beneficial ownership of 20 per cent or more of (i) Incos then
outstanding Voting Securities (defined at this time to be Incos Common Shares) or (ii) its then
outstanding Common Shares alone, in either case without complying with the permitted bid
provisions of the plan (as summarized below), or without the approval of Incos Board of Directors.
Should such an acquisition occur, each right would entitle its holders, other than the acquiring
person or persons related to or acting jointly or in concert with such person, to purchase
additional Common Shares of the Company at a 50 per cent discount to the then current market price.
The acquisition by any person (an Acquiring Person) of 20 per cent or more of Incos Common
Shares or Voting Securities, other than by way of a permitted bid, is referred to as a
Flip-in-Event. Any rights held by an Acquiring Person will become void upon the occurrence of a
Flip-in-Event. A permitted bid is a bid made to all holders of Incos outstanding Voting Securities that is
open for at least 60 days. If, at the end of such 60-day period, more than 50 per cent of Incos
then outstanding Common Shares, other than those securities owned by the party making the bid and
certain related persons, have been tendered, such party may take up and pay for the Common Shares
but must extend the bid for a further 10 business days to allow other shareholders to tender, thus
providing shareholders who had not tendered to the bid with enough time to tender to the bid once
it is clear that a majority of Common Shares have been tendered. Under the plan, Inco can (i) waive its application to enable a particular takeover bid to
proceed, in which case the plan will be deemed to have been waived with respect to any other
takeover bid made prior to the expiry of any bid subject to such waiver or (ii) with the prior
approval of the holders of Voting Securities or rights, redeem the rights for nominal consideration
at any time prior to a Flip-in-Event. 72




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Item 3. Legal Proceedings There are no material pending legal proceedings to which Inco or any of its subsidiaries
is a party or of which their property is the subject. Inco and its subsidiaries are subject to
routine litigation incidental to the business conducted by them, to various environmental
proceedings, and to other litigation related to such business that Inco does not believe to be
material. Among the environmental proceedings are claims for personal injury, enforcement actions
and certain claims dating back a number of years in which one of our subsidiaries was designated,
under the United States federal environmental law known as Superfund, or CERCLA, as a
potentially responsible party. The Superfund claims assert that, as a potentially responsible
party, Incos subsidiary sent waste to a contaminated landfill or similar site and is jointly and
severally liable for the cost of remediating such site. These claims have not proceeded to a point
where a reliable assessment can be made of the costs to Inco, assuming responsibility is found to
exist or liability is determined, but we believe, based upon our present information concerning
these matters and its past experience, that its potential liability, if found to exist, would not
be significant. Inco has from time to time been named as a party or charged in connection with the alleged
violation of, including exceeding regulatory limits relating to discharges under, certain
environmental or similar laws and regulations applicable to its operations in Canada and elsewhere.
Such proceedings have involved, and with respect to currently pending charges may ultimately
involve, fines or similar sanctions in excess of $100,000. However, none of these currently
pending or threatened proceedings are material, either singly or in the aggregate, to our results
of operations, financial condition or liquidity. 
 Item 4. Submission of Matters to a Vote of Security Holders No
matters were submitted to a vote of security holders in the fourth
quarter of 2004. 73




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Executive Officers of Inco Limited The names, offices held and ages as of the date of this Report of the executive officers
of Inco Limited are shown below. OfficerName
    
    Office
    
    Age
    
    SinceScott M. Hand
    
    Chairman and Chief Executive Officer
    
    
    62
    
    
    
    1984Peter C. Jones
    
    President and Chief Operating Officer
    
    
    57
    
    
    
    1997Stuart F. Feiner
    
    Executive Vice-President, General Counsel and Secretary
    
    
    56
    
    
    
    1992Peter J. Goudie
    
    Executive Vice-President, Marketing
    
    
    56
    
    
    
    1997Farokh S. Hakimi
    
    Executive Vice-President and Chief Financial Officer
    
    
    56
    
    
    
    2002Logan W. Kruger
    
    Executive Vice-President, Technical Services
    
    
    54
    
    
    
    2003Ronald C. Aelick
    
    Executive Vice-President and President, Canadian and U.K. Operations
    
    
    56
    
    
    
    1995Stephanie E. Anderson
    
    Vice-President and Treasurer
    
    
    43
    
    
    
    2004Subhash Bhandari
    
    Vice President and Chief Information Officer
    
    
    60
    
    
    
    2001Edward H. Bassett
    
    Vice-President, Capital Projects and Engineering
    
    
    58
    
    
    
    2005Mark J. Daniel
    
    Vice-President, Human Resources
    
    
    58
    
    
    
    2000Bruce R. Drysdale
    
    Vice-President, Public and Government Affairs
    
    
    38
    
    
    
    2004Philippus F. du Toit
    
    Managing Director, Voiseys Bay Nickel Company Limited
    
    
    52
    
    
    
    2003John B. Jones
    
    Vice-President, Business Development  Asia
    
    
    62
    
    
    
    1999Gary G. Kaiway
    
    Vice President, Taxation
    
    
    56
    
    
    
    2001William B. Kipkie
    
    Vice-President, Inco Special Products
    
    
    59
    
    
    
    2003Ronald A. Lehtovaara
    
    Vice-President and Comptroller
    
    
    54
    
    
    
    1996William A. Napier
    
    Vice-President, Environment and Health
    
    
    50
    
    
    
    2000S. Nicholas Sheard
    
    Vice-President, Exploration
    
    
    55
    
    
    
    2003
 Each executive officer is elected by the Board of Directors of Inco Limited annually, at the
first meeting of such Board (Annual Board Meeting) after the annual meeting of shareholders, for
a term of one year or until a successor shall have been duly chosen and qualified, except in those
cases where an executive officer is elected at other than the Annual Board Meeting, in which event
such executive officers tenure will expire at the next Annual Board Meeting unless re-elected.
Such tenure is subject to an officers resignation or removal as provided in Incos By-law No. 1,
its sole by-law, and Incos standing resolution adopted pursuant thereto. Except for the officers mentioned below, each executive officer named above has been an
officer or executive or key managerial employee of Inco Limited or one of its subsidiaries during
the past five years. From October 1997 until November 1999, Mr. Hakimi was Vice-President and
Treasurer of Cyprus Amax Mineral Company, a leading producer of copper and the worlds largest
producer of molybdenum, based in Englewood, Colorado, and from January 2000 until July 2001 he was
Vice-President and Chief Financial Officer of Rio Algom Limited, a global mining and metals company
based in Toronto, Ontario. From September 1998 until June 2002, Mr. Kruger was President and Chief
Executive Officer, Hudson Bay Mining and Smelting Co. Limited, a mining company based in Winnipeg,
Manitoba, and from June 2002 until September 2003, he was Executive Vice President and Head of
Copper, Anglo American plc, a global mining and metals company based in London, England. From May
1997 until January 2000, Mr. du Toit was Operations Director, Voest Alpine Industries Inc., an
engineering company based in Poole, England, and from February 2000 until April 2003 he held senior
management positions, most recently President, with Diavik Diamond Mines Inc., a diamond mining
company based in Yellowknife, Northwest Territories. During the five-year period prior to joining
Inco, Mr. Bassett served as Executive Vice-President of SNC Lavalin Inc., an engineering company
based in Montreal, Quebec; Mr. Bhandari held senior management positions, most recently General
Manager, Purchasing and Information Systems, with Toyota Motor Manufacturing Canada Ltd., an
automobile manufacturing company based in Cambridge, Ontario; Mr. Kaiway held senior management
positions, most recently Vice-President, Taxation, with Placer Dome Inc., a gold mining company
based in Vancouver, British Columbia; and Mr. Sheard held senior management positions, most
recently as Global Exploration Manager, with MIM Holdings Pty Ltd., a base metals, gold and coal
mining company based in Brisbane, Australia acquired by Xstrata plc. The dates shown in the table extend from the first date of election as an executive officer of
Inco. There are no family relationships among the directors and executive officers of Inco, and no
arrangements or understandings between any executive officer and any other person pursuant to which
he was elected as an executive officer. 74




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PART II 
 Item 5. Markets for Inco Limiteds Common Shares, Related Shareholder Matters and Inco
Limiteds Issuances or Purchases of Equity Securities 
 Common Shares 
 Market Information There are two principal markets on which Incos Common Shares are traded, the New York
Stock Exchange (the NYSE) and the Toronto Stock Exchange (the TSX). The high and low closing sale prices for Incos Common Shares as reported on the NYSE and the
TSX for each quarter during the past two years are as follows: New York Stock Exchange (U.S. $)2004
    
    
    20031st Q
    
    
    2nd Q
    
    
    3rd Q
    
    
    4th Q
    
    
    1st Q
    
    
    2nd Q
    
    
    3rd Q
    
    
    4th QHigh
    
    
    41.34
    
    
    
    36.43
    
    
    
    39.20
    
    
    
    40.25
    
    
    
    23.12
    
    
    
    21.17
    
    
    
    28.51
    
    
    
    40.90Low
    
    
    31.72
    
    
    
    28.19
    
    
    
    31.21
    
    
    
    34.28
    
    
    
    18.00
    
    
    
    18.30
    
    
    
    20.98
    
    
    
    28.30
 Toronto Stock Exchange (Cdn. $)2004
    
    
    20031st Q
    
    
    2nd Q
    
    
    3rd Q
    
    
    4th Q
    
    
    1st Q
    
    
    2nd Q
    
    
    3rd Q
    
    
    4th QHigh
    
    
    53.10
    
    
    
    47.99
    
    
    
    49.87
    
    
    
    50.58
    
    
    
    35.40
    
    
    
    28.67
    
    
    
    38.46
    
    
    
    53.63Low
    
    
    42.49
    
    
    
    39.10
    
    
    
    41.03
    
    
    
    42.35
    
    
    
    26.35
    
    
    
    25.15
    
    
    
    27.99
    
    
    
    37.98
 On March 11, 2005, the closing sale prices for the Companys Common Shares were $41.65 on
the NYSE and Cdn.$50.19 on the TSX. During the fourth quarter of 2004, no equity securities of the Company were sold by the
Company which were not registered under the Securities Act of 1933, as amended. 
 Holders of Common Shares The total number of holders of record of the Companys Common Shares as of February 18,
2005 was 17,143. 
 Dividends Subject to the preferential rights of any prior ranking shares (of which none were issued
and outstanding as of the date of this report), the holders of Common Shares are entitled to such
dividends as may be declared by the Board of Directors out of funds legally available therefor. No
dividend or other distribution on the Common Shares shall be paid, and no Common Share shall be
acquired for value, unless dividends on all outstanding Preferred Shares have been paid for all
past quarterly periods. At its meeting in February 1999, the Board of Directors eliminated the payment of quarterly
dividends in respect of the Common Shares. The Board continues to review on a periodic basis the
declaration and payment of dividends on the Common Shares in the future. The Companys dividend
policy, under normal circumstances and after taking into account the Companys short-term and
long-term needs and objectives, is to declare and pay dividends on the Common Shares averaging
approximately one-third of reported net earnings over a period of years. A sustainable level of
regular quarterly dividends would be paid, adjusted, when appropriate, by extra dividends. The
quarter-to-quarter decision as to the restoration and amount of any quarterly dividend per Common
Share is reviewed by the Board of Directors and determined with reference to a number of factors,
including current business results and cash needs. 
 Common Share Purchase Warrants As part of the redemption price Inco paid in connection with the redemption of the
Companys Class VBN Shares discussed under Class VBN Shares below, Inco issued approximately 11
million Common Share Purchase Warrants (the Warrants). The Warrants were issued under, and are
governed by, a Warrant Agreement dated as of December 1, 2000 by and among Inco, CIBC Mellon Trust 75




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Company, as the Canadian Warrant Agent, and ChaseMellon Shareholder Services, L.L.C., as the
U.S. Warrant Agent (the Warrant Agreement). Each whole Warrant entitles the holder to purchase one Common Share at an exercise price of
Cdn.$30.00 (or the equivalent in U.S. dollars based upon then prevailing exchange rates at the time
of exercise), subject to certain adjustments (the Exercise Price), until 5:00 pm (Toronto time)
on August 21, 2006. Any Warrants not exercised prior to such date will expire. A Warrant holder
does not have any voting or pre-emptive rights or any other rights as a shareholder of the Company
until the Warrants held by such holder have been duly exercised and Common Shares of the Company
have been issued to the holder pursuant thereto. The Warrant Agreement provides that the Exercise Price and/or the number and kind of
securities or property issuable on the exercise of the Warrants are subject to adjustment in
certain events, including (1) the subdivision or consolidation of the Common Shares, (2) the
issuance to all or substantially all the holders of Common Shares of a stock dividend or other
distributions excluding any issuance of securities to holders of outstanding Common Shares which
constitutes a Dividend Paid in the Ordinary Course (defined generally in the Warrant Agreement to
include dividends or other distributions exceeding certain threshold aggregate or annual amounts
based upon the value of the dividends or other distributions paid or consolidated net earnings for
specified periods), and (3) the distribution to all or substantially all the holders of Common
Shares of (i) shares of any other class, (ii) rights, options or warrants to acquire Common Shares,
or (iii) cash, property or other assets of the Company (excluding, in each case, Dividends Paid in
the Ordinary Course). The Exercise Price and/or the number and kind of securities or property issuable on exercise
will also be subject to certain adjustments in connection with certain other events, including any
change, reclassification or alteration of the Common Shares, the consolidation, amalgamation,
merger or other similar arrangement of the Company with another Company, or the transfer of all or
substantially all of the Companys assets. No adjustment in the Exercise Price or the number or kind of securities or property issuable
upon exercise will be required to be made (1) unless the cumulative effect of such adjustment or
adjustments would change the Exercise Price by at least one per cent or, in the event of a change
in the number of Common Shares purchasable upon exercise, the number of Common Shares issuable
would change by at least one one-hundredth of a Common Share or (2) in respect of the issue of
Common Shares pursuant to (i) the exercise of the Warrants or (ii) the Companys Optional Stock
Dividend Program and Share Purchase Plan and options granted current or former employees of the
Company or any other option or share purchase plan. The Warrant Agreement provides that modifications and alterations to it and to the Warrants
may be made if authorized by extraordinary resolution and if all other necessary approvals are
received. The term extraordinary resolution is defined in the Warrant Agreement to mean, in
effect, a resolution passed by the affirmative votes of the holders of not less than 66 2/3 per
cent of the Warrants represented and voting at a meeting of Warrant holders or an instrument or
instruments in writing signed by the holders of not less than 66 2/3 per cent of the outstanding
Warrants. The Warrant Agreement and the Warrants may be modified and altered without authorization
by extraordinary resolution and if all necessary approvals are received in order to cure defects or
ambiguities, to make ministerial amendments otherwise provided that the rights of Warrant holders
are not materially adversely affected thereby. The Warrants are listed on the TSX and on the NYSE. Subject to applicable law, Inco may
purchase Warrants in the market or by tender or private contract, and any Warrants so purchased
will be cancelled. 
 Other Information Under its articles of incorporation, Inco is authorized to issue an unlimited number of
Common Shares. For a description of Incos outstanding debentures and notes which are convertible into Common
Shares, see Notes 11 and 15 to the financial statements under Item 8 of this Report. The Common Shares have general voting rights. At shareholders meetings, each holder of these
securities is entitled to one vote for each share held and there are no cumulative voting
provisions. See Note 18 to the financial statements under Item 8 this Report. 
 Class VBN Shares At a special meeting of shareholders held on November 28, 2000, Inco received the
requisite shareholder approval to amend the terms of the Class VBN Shares that had been created in
August 1996 in connection with the Companys acquisition of Diamond 76




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Fields to provide for their redemption. The amendments allowed the Company to redeem each of
its Class VBN Shares for Cdn.$7.50 (or the equivalent in U.S. dollars) in cash and a fraction,
0.45, of a Warrant. For a description of the Warrants, see Common Share Purchase Warrants above.
All of the Class VBN Shares were redeemed by the Company, effective December 14, 2000, for a total
redemption price of $133 million plus approximately 11.6 million Warrants which were reserved for
issuance. As of December 31, 2004, 2003 and 2002, approximately 11 million Warrants had been
issued in connection with this redemption. Approximately 550,000 Warrants still have not been
issued given the limited number of holders of Class VBN Shares who did not accept the redemption
consideration and elected under applicable legislation prior to the effective date of the
redemption to have a court in the Province of Ontario determine the fair value of their Class VBN
Shares. As of the date of this Report, this court proceeding was still in discovery and related
preliminary stages. 
 Preferred Shares 
 Certain Provisions of the Preferred Shares as a Class Issuable in Series Incos authorized share capital includes 45 million Preferred Shares issuable in series, each
series consisting of such number of shares and having such provisions attached thereto as may be
determined by the Board of Directors of the Company, subject to a maximum aggregate issue price of
Cdn.$1,500 million (or the equivalent in other currencies). As of the date of this Report, no
Preferred Shares were issued or outstanding. Priority The Preferred Shares of each series rank on a parity with the Preferred Shares of every other
series, and prior to the Common Shares with respect to the payment of cumulative dividends and the
distribution of assets on a liquidation, dissolution or winding up of the Company or for the
purpose of winding up its affairs (Liquidation). Creation and Issue of Additional Preferred Shares Subject to applicable law, Inco may, without the consent of the holders of the Preferred
Shares as a class, (i) create additional Preferred Shares, (ii) create preferred shares of another
class or classes ranking on a parity with the Preferred Shares with respect to the payment of
dividends and/or the distribution of assets on Liquidation and (iii) increase any maximum number of
authorized shares of any one or more of such other classes of shares. If (but only so long as) any
dividends are in arrears on any outstanding series of the Preferred Shares, the Company may not,
without the consent, by a simple majority of the votes cast, of the holders of the Preferred Shares
as a class, (i) issue any additional series of the Preferred Shares, or (ii) issue preferred shares
of another class ranking on a parity with the Preferred Shares with respect to the payment of
dividends and/or the distribution of assets on Liquidation. Class Voting Rights The holders of the Preferred Shares are not entitled to any voting rights as a class except
(i) as provided above, (ii) as provided by law, or (iii) with respect to the right to vote on
certain matters as described under Modification below. When the holders of Preferred Shares vote
as a class, or when two or more series of Preferred Shares vote together at a joint meeting, each
holder has one one-hundredth of a vote in respect of each Canadian dollar (or its equivalent in a
foreign currency at the date of issuance) of the issue price of the Preferred Shares he or she
holds. The Board of Directors of Inco may, at the time of creation of any series of Preferred Shares,
confer voting rights on such series in addition to the voting rights of the holders of the
Preferred Shares as a class. It is the Board of Directors intention that, with respect to the
creation of any future series of Preferred Shares, to the extent that such Preferred Shares would
have general voting rights then such shares would not have more than one vote in respect of each
Preferred Share. Modification The class provisions attaching to the Preferred Shares may be amended at any time with such
approval of the holders of such shares as may then be required by law or by the rules of any stock
exchange on which the shares or any series of Preferred Shares are then listed. Currently, this
approval requirement is by at least two-thirds of the votes cast at a meeting of such holders duly
called for the purpose and at which a quorum is present, or as are required by the rules of any
stock exchange upon which the shares of any 77




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##### Table of Contents



series of Preferred Shares are then listed. In addition, the approval by at least two-thirds
of the votes cast at a meeting of the holders of all shares of the Company carrying general voting
rights is currently required by law for the amendment of such class provisions. 
 Series E Preferred Shares The Series E Preferred Shares issued in August 1996 in connection with the acquisition of
Diamond Fields were redeemed by the Company on May 1, 2003. 
 Securities Authorized for Issuance Under Equity Compensation Plans The number of shares of Inco that may be issued upon the exercise of outstanding options,
warrants and rights under our equity compensation plans at December 31, 2004, the weighted average
exercise price of such options, warrants and rights, and the number of shares remaining available
for future issuance under such plans are shown in the following table: (C)(A)
    
    
    (B)
    
    
    Number ofNumber of
    
    
    Weighted
    
    
    remaining securitiessecurities to be
    
    
    average
    
    
    available for futureissued upon
    
    
    exercise price
    
    
    issuance underexercise of
    
    
    of outstanding
    
    
    equity compensationoutstanding
    
    
    options,
    
    
    plans (excludingoptions, warrants
    
    
    warrants and
    
    
    securities reflectedPlan category
    
    and rights(1)
    
    
    rights
    
    
    in column (A))(2)Equity compensation plans approved by security holders
    
    
    4,082,030
    
    
    $
    26.45
    
    
    
    2,792,750Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,082,030
    
    
    $
    26.45
    
    
    
    2,792,750
   (1)
    
    Consists of Common Shares authorized for issuance upon the exercise of options outstanding
as of December 31, 2004 under (i) Incos 1993 Key Employee Incentive Plan (the 1993 KEIP)
and 1997 Key Employees Incentive Plan (the 1997 KEIP), each of which has been superseded and
under which no further options may be granted; (ii) Incos 2001 Key Employees Incentive Plan
(the 2001 KEIP); and (iii) Incos 2002 Non-Employee Director Share Option Plan (the 2002
NEDSOP) which was suspended by Incos Board of Directors as of February 3, 2004.(2)
    
    Consists of Common Shares authorized for issuance as of December 31, 2004 pursuant to the
exercise of options which may be granted under the 2001 KEIP. Does not include 200,000 Common
Shares available for future issuance under the 2002 NEDSOP. See Note 1 above. 
 Other Information There is no limitation or restriction imposed by Canadian law or by our restated articles
of incorporation on the right of a non-resident of Canada to hold or vote Incos common shares,
except in the case where a non-resident of Canada were to seek to acquire control of Inco. The
Investment Canada Actrequires notification to and, in certain cases, advance review and approval
by, the Government of Canada of the acquisition by a non-Canadian of control of a Canadian
business, all as defined in this legislation. Generally speaking, in order for an acquisition to
be subject to advance review and approval under this legislation the value of the acquired entitys
gross assets currently must exceed Cdn.$250 million. This threshold is higher if the acquirer is a
resident of a country which is a member of the World Trade Organization. See also the discussion
of the Shareholder Rights Plan under Shareholder Rights Plan above and in Note 18 to the
financial statements under Item 8 of this Report. Canadian federal tax legislation, in conjunction with applicable tax treaties, generally
requires that we withhold 15 per cent from dividends paid by the Company to its shareholders
resident in the United States, the United Kingdom and most western European countries. Similarly,
depending upon applicable tax treaties, dividends paid to other non-residents of Canada are subject
to a withholding tax at a maximum rate of 25 per cent. The amount of a stock dividend (for tax
purposes) would generally be equal to the amount by which the stated capital of the Company has
increased by reason of the payment of such dividend. Under regulations presently in effect in the
United States, the Company is generally subject to the U.S. backup withholding rules which would
require withholding at a rate of 28 per cent on dividends and interest paid to certain U.S. persons
who have not provided the Company with a taxpayer identification number. Recent legislation
enacted in the U.S. has reduced the tax rate to 15 per cent on dividends paid to U.S. individual
shareholders of non-U.S. corporations such as the Company that meet certain requirements. Through subsidiaries and affiliates, Incos operations are conducted in numerous countries and
some $3,100 million of our consolidated total assets are located outside Canada and the United
States. Accordingly, operations are subject to various governmental policies or regulations and
changes therein and the risks associated with doing business in many overseas locations. 78




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At December 31, 2004, 61 per cent of the holders of our Common Shares had addresses in Canada,
29 per cent had addresses in the United States and 10 per cent elsewhere. Canadian residents of
record held 46 per cent of our issued and outstanding Common Shares, United States residents of
record held 53 per cent and residents of record of other countries held one per cent. 79




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Item 6. Selected Financial Data The following table provides selected financial data as reported in Incos consolidated
financial statements on the basis of GAAP in Canada: Year Ended December 31,2004
    
    
    2003(2)
    
    
    2002(2)
    
    
    2001
    
    
    2000(Restated)
    
    
    (Restated)($ in millions, except per share amounts)Net sales
    
    $
    4,278
    
    
    
    2,474
    
    
    
    2,161
    
    
    
    2,066
    
    
    
    2,917Cost of
sales and other operating expenses, excluding depreciation and depletion
    
    $
    2,348
    
    
    
    1,735
    
    
    
    1,378
    
    
    
    1,416
    
    
    
    1,776Depreciation and depletion (3)
    
    $
    248
    
    
    
    227
    
    
    
    242
    
    
    
    263
    
    
    
    265Selling, general and administrative
    
    $
    192
    
    
    
    169
    
    
    
    136
    
    
    
    111
    
    
    
    105Asset impairment charges
    
    $
    201
    
    
    
    
    
    
    
    2,415
    
    
    
    
    
    
    
    Interest expense
    
    $
    24
    
    
    
    44
    
    
    
    50
    
    
    
    56
    
    
    
    83Income and mining taxes (3)
    
    $
    430
    
    
    
    (37
    )
    
    
    (636
    )
    
    
    (85
    )
    
    
    225Net earnings (loss) (3)
    
    $
    612
    
    
    
    153
    
    
    
    (1,477
    )
    
    
    304
    
    
    
    399Preferred dividends
    
    $
    
    
    
    
    (6
    )
    
    
    (26
    )
    
    
    (26
    )
    
    
    (26
    )Accretion of convertible debt
    
    $
    (9
    )
    
    
    (7
    )
    
    
    (4
    )
    
    
    (3
    )
    
    
    Premium on redemption of preferred shares
    
    $
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss) applicable to common shares (3)
    
    $
    603
    
    
    
    125
    
    
    
    (1,507
    )
    
    
    275
    
    
    
    373Net earnings (loss) per common share  basic(1) (3)
    
    $
    3.22
    
    
    
    0.68
    
    
    
    (8.24
    )
    
    
    1.51
    
    
    
    2.06Common shares outstanding (weighted average, in millions)
    
    
    188
    
    
    
    185
    
    
    
    183
    
    
    
    182
    
    
    
    182Total assets (3)
    
    $
    10,723
    
    
    
    9,063
    
    
    
    8,596
    
    
    
    9,630
    
    
    
    9,726Long-term debt
    
    $
    1,551
    
    
    
    1,409
    
    
    
    1,546
    
    
    
    759
    
    
    
    952Convertible debt
    
    $
    619
    
    
    
    606
    
    
    
    238
    
    
    
    231
    
    
    
    Preferred shares
    
    $
    
    
    
    
    
    
    
    
    472
    
    
    
    472
    
    
    
    472
   (1)
    
    Net earnings (loss) per common share is calculated by dividing net earnings (loss)
applicable to Common Shares by the weighted-average number of Common Shares issued and
outstanding for the relevant period.(2)
    
    Reference is made to Note 2 to the financial statements under Item 8 of this Report.(3)
    
    Amounts reported in 2001 and 2000 have not been restated for the change in depreciation and
depletion as discussed in Note 2 to the financial statements under Item 8 of this Report. There are a number of differences between Canadian and United States GAAP. The
differences, insofar as they affect Incos consolidated financial statements, relate to accounting
for post-retirement benefits, unrealized currency translation gains
(losses) on the Voiseys Bay project deferred income and mining tax
liabilities, research and development, exploration, asset
impairment, our convertible debt, derivative instruments, investments, income and mining taxes and
reporting of comprehensive income. A full discussion of these differences is presented in the
Notes to the financial statements under Item 8 of this Report and, in particular, Note 24 to such
financial statements. 80




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The following table reconciles results as reported under Canadian GAAP with those that would
have been reported under United States GAAP: Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Restated)(1)
    
    
    (Restated)(1)
    
    
    
    
    
    
    (Restated)($ in millions, except per share amounts)Net earnings (loss)  Canadian GAAP
    
    $
    612
    
    
    $
    153
    
    
    $
    (1,477
    )
    
    $
    304
    
    
    $
    399Increased post-retirement benefits expense
    
    
    (39
    )
    
    
    (37
    )
    
    
    (23
    )
    
    
    (22
    )
    
    
    (22
    )Unrealized currency translation gains (losses) on
Voiseys Bay project deferred income and mining tax
liabilities
    

    
    (81
    )
    
    
    (207
    )
    
    
    (49
    )
    
    
    122
    
    
    
    79Increased intangible assets amortization expense
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    Increased research and development expense
    
    
    (17
    )
    
    
    (5
    )
    
    
    (6
    )
    
    
    (8
    )
    
    
    Decreased (increased) exploration expense
    
    
    1
    
    
    
    (4
    )
    
    
    (3
    )
    
    
    (7
    )
    
    
    Decreased (increased) asset impairment charges
    
    
    11
    
    
    
    
    
    
    
    (961
    )
    
    
    
    
    
    
    Increased interest expense
    
    
    (26
    )
    
    
    (25
    )
    
    
    (9
    )
    
    
    (11
    )
    
    
    Unrealized net gain (loss) on derivative instruments
    
    
    5
    
    
    
    (1
    )
    
    
    5
    
    
    
    (4
    )
    
    
    Increased income and mining tax expense
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    Decreased (increased) minority interest
    
    
    (8
    )
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    Change in accounting policy
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Taxes on United States GAAP differences
    
    
    21
    
    
    
    30
    
    
    
    144
    
    
    
    17
    
    
    
    9Net earnings (loss)  United States GAAP before
cumulative effect of a change in accounting principle
    
    
    479
    
    
    
    (112
    )
    
    
    (2,378
    )
    
    
    394
    
    
    
    466Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (17
    )
    
    
    (2
    )
    
    
    
    
    
    
    Net earnings (loss)  United States GAAP
    
    $
    479
    
    
    $
    (129
    )
    
    $
    (2,380
    )
    
    $
    394
    
    
    $
    466Net earnings (loss) per share  BasicNet earnings (loss) per share before cumulative
effect of a change in accounting principle
    
    $
    2.55
    
    
    $
    0.72
    
    
    $
    (13.15
    )
    
    $
    2.02
    
    
    $
    2.42Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (0.09
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    Net earnings (loss) per share  Basic
    
    $
    2.55
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )
    
    $
    2.02
    
    
    $
    2.42Net earnings (loss) per share  DilutedNet earnings (loss) per share before cumulative
effect of a change in accounting principle
    
    $
    2.32
    
    
    $
    (0.72
    )
    
    $
    (13.15
    )
    
    $
    1.98
    
    
    $
    2.21Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (0.09
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    Net earnings (loss) per share  Diluted
    
    $
    2.32
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )
    
    $
    1.98
    
    
    $
    2.21
   (1)
    
    Reference is made to Note 2 to the financial statements under Item 8 of this Report. The selected financial data item Preferred shares would be reported in the same amounts
under Canadian and United States GAAP. Under United States GAAP, convertible debt would be
classified as debt and the selected financial data item Long-term debt would be increased by $643
million at December 31, 2004. Under United States GAAP, Total assets would be reported as $9,373
million at December 31, 2004 (2003  $7,973 million; 2002  $7,727 million; 2001  $9,755 million;
2000  $9,856 million). 81




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations 
 Overview The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with our 2004 consolidated financial statements
and notes, which are expressed in U.S. dollars and prepared in accordance with generally accepted
accounting principles (GAAP) in Canada, which generally conform with those principles established
in the United States except as explained in note 24 to our 2004 consolidated financial statements.
This MD&A contains certain forward-looking statements based on our current expectations. These
forward-looking statements entail various risks and uncertainties, as discussed below, which could
cause actual results to differ materially from those reflected in these forward-looking statements.
Reference is also made to the Cautionary Statement Regarding Forward-Looking Statements above. 
 Nature of our Business We are a leading producer of nickel, a hard, malleable metal which, given its properties
and wide range of applications, can be found in thousands of products. The largest end use for
nickel is in the production of austenitic or nickel-bearing stainless steels. This end use
currently accounts for about two-thirds of demand for primary nickel. We define primary nickel to
be nickel produced from nickel-containing ores. The other principal source of nickel, as discussed
below, for nickel-bearing stainless steels and certain other industrial applications is secondary
nickel or nickel-containing recycled or scrap material. We are also an important producer of
copper, precious metals and cobalt and a major producer of value-added specialty nickel products.
Our principal mines and processing operations are located in the Sudbury area of Ontario, the
Thompson area of Manitoba and, through a subsidiary in which we have an equity interest of 61 per
cent, PT International Nickel Indonesia Tbk (PT Inco), on the island of Sulawesi, Indonesia. We
also operate wholly-owned metals refineries at Port Colborne, Ontario and in the United Kingdom at
Clydach, Wales and Acton, England. We also have interests in nickel refining capacity in Japan,
through Inco TNC Limited, in which we have an equity interest of 67 per cent; in Taiwan, through
Taiwan Nickel Refining Corporation, in which we have an equity interest of 49.9 per cent; and in
South Korea, through Korea Nickel Corporation, in which we have an equity interest of 25 per cent.
Additionally, we have a 65 per cent equity interest in Jinco Nonferrous Metals Co., Ltd., a company
that produces nickel salts in Kunshan City, Peoples Republic of China (China). We have also
expanded our joint venture operations in China, through the formation of a new company, Inco
Advanced Technology Materials (Dalian) Co., Ltd., in which we have an equity interest of 76.7 per
cent. This venture produces nickel foam products for the Asian battery market. In early March
2005, we completed the acquisition of substantially all of the assets representing the nickel foam
business of Shenyang Golden Champower New Materials Corp., a leading Chinese producer of nickel
foam. Pursuant to the terms of this acquisition, we will have a 77 per cent interest in the
company formed to hold these assets. In addition, in 2004 we established a shearing and packaging
operation in China for certain nickel products to service the specific needs of this market. Our business operations consist of two segments, our (i) finished products segment,
representing our mining and processing operations in Ontario and Manitoba, our refining operations
in the United Kingdom and interests in the refining operations in Japan and other Asian countries
referred to above, and (ii) intermediates segment, which represents PT Incos mining and processing
operations in Indonesia, where nickel-in-matte, an intermediate product, is produced and sold
primarily into the Japanese market. In addition, as part of our strategy to be the worlds lowest
cost and most profitable nickel producer, we are currently developing two major new or so-called
greenfield projects, our wholly-owned Voiseys Bay nickel-copper-cobalt project in the Province
of Newfoundland and Labrador, Canada and our Goro nickel-cobalt project in the French overseas
territorial community (collectivité territoriale) of New Caledonia (New Caledonia) in which we
currently hold approximately a 90 per cent interest following the capitalization of certain
shareholder advances in late February 2005. In recent years, sales of our primary metal products were concentrated in the United States,
Europe, Japan, elsewhere in Asia, and Canada, with about 62 per cent of our 2004 revenues from
nickel derived from sales of our nickel products in Asia. 
 Key Factors Affecting our Business The price of nickel has represented, and is currently expected to continue to represent,
the principal determinant of our profitability and cash flow from operations. Accordingly, our
financial performance has been, and is expected to continue to be, closely linked to the price of
nickel and, to a lesser extent, the price of copper and other primary metals produced by us.
Historically, the demand for nickel has been closely correlated to industrial production in the
major industrialized regions, in particular North America and Europe and more recently Asia, and we
expect this positive correlation to continue. During 2004 we experienced, and 82




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currently expect to
continue to experience at least in 2005, very favourable conditions and realized prices for the nickel products we
produce based upon the relationship that has recently existed, and is currently expected to
continue to exist at least for 2005, between global nickel supply and demand, given that
global nickel supply has not kept, and is currently not expected to keep, pace with
underlying global nickel demand. While we currently believe that this favourable
relationship between global nickel supply and demand will continue beyond 2005, we are not in a position to predict that those
conditions will continue given the wide range of factors that could affect such conditions. In
2004, our average realized price for the nickel products we sold was $13,906 per tonne ($6.31 per
pound), compared with $9,860 per tonne ($4.47 per pound) for 2003. The London Metal Exchange
(LME) cash price for nickel, the price that is generally viewed as the benchmark price for
nickel, averaged $13,852 per tonne ($6.28 per pound) in 2004, compared with $9,640 per tonne ($4.37
per pound) in 2003. Given the relatively high nickel prices which prevailed during 2004, the
nickel industry did experience in 2004 some substitution of other products for primary nickel as
well as the substitution of stainless steels having lower grades of nickel content or no nickel for
stainless steels having higher grades of nickel. Since we sell our nickel products in all major geographical markets, the realized prices for
our primary nickel and other metal products are influenced by both global and regional
supply-demand factors and by the availability and prices of secondary or metal-containing scrap
material, including nickel-containing scrap generated by the stainless steel industry and other
substitute or competing commodity products for the primary nickel and other metal products we
produce. We believe that the industrial-based recoveries of the United States and Japanese
economies, coupled with continued economic growth in China and other Asian countries, as well as
the influence of hedge or similar funds which purchase and sell or otherwise trade in metals for
profit (Metals Trading Funds), were important factors in the increase and volatility in nickel
prices experienced in 2004. We currently expect these factors will continue to affect nickel
demand and nickel prices at least for 2005. While global demand for nickel is the most important determinant of our profitability and cash
flow from operations, our financial results are also affected by increases in the costs we incur to
produce nickel and our other metals. In 2003 and 2004, we experienced increases in our costs due
to a number of factors, including rising energy and pension and other post-retirement benefits
expenses, and the continued strengthening of the Canadian dollar relative to the U.S. dollar and
the effect this has had on our operating costs incurred in Canadian dollars. While we have
continued to implement programs designed to manage our costs, our ability to successfully do so
will influence our profitability and cash flow from operations. We are moving forward with our Voiseys Bay and Goro development projects as well as other
capital investment initiatives. In 2004, we spent $447 million, including capitalized interest, on
our Voiseys Bay project, which currently includes an open pit mine, concentrator and related
facilities and certain research and development and other programs, and we currently expect to
spend approximately $410 million on this project in 2005. We currently expect the first shipment
of intermediate nickel concentrate from Voiseys Bay to our Ontario and Manitoba operations in late
2005, with initial finished nickel production from Voiseys Bay nickel concentrate in early 2006.
We currently plan to spend approximately $560 million, including capitalized interest, on our Goro
project in 2005. In addition, PT Inco announced plans in 2004 to construct a third dam at a cost
of approximately $150 million. The new dam is the first stage of a four-year $250 million capital
program aimed at raising PT Incos annual production by 25 per cent to about 200 million pounds of
nickel-in-matte by 2009. Our development projects are very important to our future given that (1)
the Voiseys Bay project represents a key source of intermediate product for our Manitoba and
Ontario operations, in particular our Manitoba operations given the decline in mine production
which has been experienced over the past few years at this operation, and (2) these projects will
be needed if we are to remain a leading nickel producer in an expected growing nickel market. Our Canadian operations, in particular our Manitoba operations, will remain dependent at least
through 2005, in order to continue to produce nickel products at, or close to, their production
capacities, on purchases of intermediate nickel products principally from two Australian companies
until we are able to supply sufficient volumes of intermediate nickel concentrate products produced
by the Voiseys Bay project to these operations. We currently plan to rely in part on, and accordingly, need to generate, very substantial cash
flow from operations to meet our sustaining capital expenditure requirements and the planned
capital expenditures for our development projects. Our planned capital expenditures are expected
to total $1,450 million in 2005. 83




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The following table shows our average realized price for nickel, the average LME cash nickel
price and our cash flow from operations (which we refer to as our net cash provided by (or used
for) operating activities) for each of the past ten years to illustrate the correlation between
nickel prices and our financial results: Inco AverageRealized Price for
    
    
    Average LME CashNickel1
    
    
    Nickel Price
    
    
    Cash Flow from OperationsYear
    
    ($ per tonne)
    
    
    ($ per tonne)
    
    
    ($ in millions)1995
    
    
    8,510
    
    
    
    8,237
    
    
    
    6311996
    
    
    7,959
    
    
    
    7,500
    
    
    
    3781997
    
    
    7,407
    
    
    
    6,916
    
    
    
    243
    21998
    
    
    5,291
    
    
    
    4,617
    
    
    
    1741999
    
    
    6,415
    
    
    
    6,027
    
    
    
    128
    22000
    
    
    9,007
    
    
    
    8,641
    
    
    
    8422001
    
    
    6,468
    
    
    
    5,948
    
    
    
    3602002
    
    
    7,143
    
    
    
    6,772
    
    
    
    5992003
    
    
    9,860
    
    
    
    9,640
    
    
    
    131
    22004
    
    
    13,906
    
    
    
    13,852
    
    
    
    1,393
   1
    
    Includes intermediates.2
    
    Cash flow from operations for 1997 reflects a one-month strike at the
Ontario operations. Cash flow from operations for 1999 and 2003
reflect three-month strikes
at our Manitoba and Ontario operations, respectively. The nickel industry is highly competitive in all of its key aspects, including the
exploration for, and the development of, new sources of supply, the acquisition of deposits, and
the processing, distribution and marketing of nickel products. The level of production and export
of primary nickel from the Russian Federation (Russia) as well as the supply of secondary or
nickel-containing scrap material, together with the continuing relatively limited level of domestic
consumption of nickel in Russia, has had, and could continue to have, a significant impact on the
nickel industrys supply-demand balance. While we produce primary nickel, the other principal
source or type of nickel used in stainless-steel and certain other industrial applications, as
noted above, is secondary nickel, which is also referred to as recycled or scrap nickel. Secondary
nickel is recovered largely from austenitic stainless steel manufacturing and fabricating
operations and nickel-containing scrap from obsolete facilities and equipment. In the recent past,
secondary nickel has represented between 44 and 48 per cent of the total nickel used in the
production of nickel-bearing or austenitic stainless steels, with primary nickel accounting for
between 52 and 56 per cent of such nickel use. These percentages can vary based upon relative
prices, the availability of scrap and other factors. To the extent that the supply of such
secondary nickel increases, such an occurrence could also adversely affect nickel prices and our
results of operations, financial condition and cash flows. 
 2004 Highlights The year 2004 was one characterized by high nickel prices which we believe were due
principally to broad-based growth in underlying global demand for nickel and nickel-containing
materials, in particular in the United States, China and certain European countries. The increase
in demand is attributed to a recovery in non-stainless steel applications for nickel, in particular
for high nickel alloys and battery materials. While primary nickel demand in stainless steel
applications experienced virtually no growth in 2004, global stainless steel production did
increase, and primary nickel demand was negatively affected in this key application by the
relatively large increase in nickel-containing scrap consumption and substitution for nickel in
certain stainless steel applications. We believe that relatively low physical inventories, high
prices and the active trading of Metals Trading Funds contributed to the volatile price conditions
experienced in 2004, volatility that the nickel markets had not experienced in over 13 years. The
difference between the high and low LME cash nickel prices for 2004 was $7,240 per tonne ($3.28 per
pound). The global nickel market was in deficit for 2004 as the level of demand exceeded the level
of supply. We believe that the level of demand was restrained by the amount of supply available,
thereby limiting the demand growth rate and the size of the actual demand-supply deficit. The global nickel market reflected favourable fundamentals for primary nickel producers such
as ourselves in 2004 as demand increased, although we estimate that underlying world demand would
have grown by approximately seven per cent from 2003 levels if adequate nickel had been available
to meet consumption. Underlying demand growth was driven by the strongest global industrial
production growth in 10 years, led by continued economic growth in China, as well as growth in
South Korea, Taiwan and Japan. The industrial economies of the United States and Europe also
exhibited growth above the levels seen in the recent 2000-2003 period. 84




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The growth in primary nickel demand in 2004 was concentrated in the non-stainless steel
sector, as demand from the stainless steel sector, the largest end use of primary nickel, was
adversely affected by several factors as discussed below. Nickel demand growth in the
non-stainless steel sector increased by seven per cent in 2004, as demand for nickel for the
production of high nickel alloys improved as a result of the recovery of the aerospace industry as
well as growth in electronics and battery applications for nickel. Nickel demand from battery
applications improved in 2004, in part due to the increased production of hybrid electric vehicles
that contain nickel in their battery systems. However, high nickel prices and substitution effects
adversely affected demand for nickel in plating applications. World production of stainless steel
increased by seven per cent to approximately 23.5 million tonnes in 2004. This growth was due, in
part, to increased capacity utilization at several large-scale stainless steel manufacturing
facilities which had been commissioned during 2002 and 2003. Stainless steel production expanded
in all major industrial regions and was particularly strong in South Korea where new production
facilities were operating at capacity during the year. However, primary nickel demand growth in
the stainless steel sector was adversely affected, as noted above, by a large increase in secondary
nickel stainless steel scrap consumption, as well as an increase in the production of stainless
steels containing relatively low amounts or grades of nickel (one to four per cent) and grades
containing no nickel compared with higher nickel (8 to 10 per cent) containing stainless steel
grades. The growth in the world supply of primary nickel in 2004 could not keep pace with the
underlying demand growth and world supply for 2004 was lower than world nickel supply in 2003,
taking into account the 60,000 tonnes of nickel that had been pledged as loan collateral by one
producer which was released into the market in 2003, although production of primary nickel
increased by four per cent in 2004. Approximately 50 per cent of global nickel production growth
was the result of our recovery from our strike-impacted levels experienced in 2003. In addition,
domestic production of nickel in China and Ukraine increased in 2004 from 2003 levels. As a
result, world primary nickel production increased by 54,000 tonnes to 1,258,000 tonnes in 2004.
However, world primary nickel supply of 1,258,000 tonnes decreased from 1,264,000 tonnes in 2003,
taking into account the release into the market in 2003 of the 60,000 tonnes of nickel referred to
above. The growth in nickel demand during 2004, coupled with the overall decline in supply for 2004
taking into account the 60,000 tonnes representing collateral for a loan which were released into
the market in 2003, as discussed below, created a deficit between supply and demand of
approximately 6,000 tonnes. Inventories of nickel on the LME, a physical market (i) where various
metals, including nickel, can be bought or sold for prompt or future delivery and (ii) representing
the principal terminal market for primary nickel in the world, decreased during 2004 by 3,174
tonnes to a relatively low level of 20,898 tonnes at December 31, 2004. LME nickel inventories
have declined by 11,610 tonnes in 2005, with such inventories totalling 9,288 tonnes as of March
10, 2005. While 2004 represented a very strong year for the global nickel market given the demand-supply
fundamentals described above, there was also, as noted above, a very significant amount of
volatility in nickel prices as reflected in the LME cash nickel price movements due, we believe,
principally to differing views on continued economic growth in China and the trading in nickel by
Metals Trading Funds. The LME cash nickel price opened the year at $16,690 per tonne ($7.57 per
pound) due, in part, to the expectation of tight market conditions. On January 6, 2004 the LME
cash nickel price reached its highest level since March 9, 1989, $17,770 per tonne ($8.06 per
pound). Despite a three-week strike at the Canadian operations of Falconbridge Limited and a
10,000 tonne reduction in LME stocks during the quarter, nickel prices experienced a volatile but
overall decline during the first quarter of 2004, with the LME cash price falling by $1,170 per
tonne ($0.53 per pound) on February 23, 2004 due, we believe, to the culmination of near-term
speculative trading in nickel by Metals Trading Funds where these Funds liquidated the positions
they had accumulated in nickel. The LME cash price was $14,220 per tonne ($6.45 per pound) at the
beginning of the second quarter, and LME stocks declined by 6,330 tonnes during that quarter.
Continued concern over a possible economic slowdown in China led to ongoing price volatility and
overall declining LME cash nickel prices to the middle of May. The LME cash nickel price reached
the year low on May 18, 2004 at $10,530 per tonne ($4.78 per pound). From that point, continued
LME stock withdrawals and positive demand growth contributed to the LME cash nickel price
increasing and ending the second quarter of 2004 at $14,990 per tonne ($6.80 per pound). In the
third quarter, trading activity was limited during the traditionally quiet summer months and with a
6,534 tonne increase in LME stocks during this period, nickel prices declined to $12,050 per tonne
($5.47 per pound) by September 9, 2004. Prices increased in late September, despite a rise in LME
inventories, and ended the quarter at $15,100 per tonne ($6.85 per pound). Nickel prices continued
to increase during the early part of the fourth quarter of 2004. However, these gains were
reversed as the nickel price fell by $2,015 per tonne (91 cents per pound) on October 13, 2004
(representing the fourth largest one day decline based upon available information), as it appeared
that a number of the Metals Trading Funds liquidated their nickel positions on that same day. We
believe that the decision to liquidate these positions was not related to any change in the
physical supply/demand fundamentals for nickel. LME stocks increased steadily throughout the
balance of the fourth quarter and ended the year at 20,898 tonnes. The LME cash price ended the
year at $15,205 per tonne ($6.90 per pound) compared with $16,650 per tonne ($7.55 per pound) at
the end of 2003. The LME cash nickel price averaged $13,852 per tonne ($6.28 per pound) over the
course of 2004, the highest average annual nominal nickel price ever based upon available data.
The LME cash nickel price during the first 10 weeks of 2005 continued to 85




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increase and was $16,210
per tonne ($7.35 per pound) on March 11, 2005. This increase in price early in 2005 was, we
believe, related to the reduction of LME stocks since the beginning of the year and renewed demand
growth from China and other regions. The following table summarizes certain world primary nickel market and LME statistics for the
years indicated (either in tonnes or in dollars per tonne in the case of prices): Year-End Combined
    
    
    
    
    
    Average AnnualWorld Primary
    
    
    
    Western World2
    
    Year-End
    
    
    LMENickel
    
    World Primary
    
    Producers and LME
    
    LME
    
    
    Cash NickelYear
    
    Demand
    
    Nickel Supply
    
    Inventories
    
    Inventories
    
    
    Prices2000
    
    1,109,000
    
    1,105,000
    
    90,000
    
    
    9,678
    
    
    $
    8,6412001
    
    1,085,000
    
    1,148,000
    
    106,000
    
    
    19,188
    
    
    
    5,9482002
    
    1,168,000
    
    1,176,000
    
    100,000
    
    
    21,972
    
    
    
    6,7722003
    
    1,244,000
    
    1,264,000
    
    104,000
    
    
    24,072
    
    
    
    9,6402004
    
    1,264,0001
    
    1,258,0001
    
    105,0001
    
    
    20,898
    
    
    
    13,852
   1
    
    Preliminary estimates.2
    
    Excludes Russia, other members of the former Commonwealth of Independent
States, China, Cuba and Eastern Europe. 
 2003 Highlights The worldnickel market strengthened in 2003 as demand grew by approximately
seven per cent during the year to 1,244,000 tonnes despite continued weakness in certain large
segments of the global economy. During 2003, growth in industrial production continued in China
and was positive in the United States and Japan for the first time in three years, while economic
recovery in Europe continued to struggle to take hold. The growth in nickel demand in 2003 was concentrated in the stainless steel sector, the
largest end use of primary nickel. Nickel demand growth in this sector increased by almost eight
per cent in 2003, driven by a significant increase in stainless steel production and a decline in
the stainless steel scrap-ratio (the proportion or ratio of nickel-containing stainless steel scrap
relative to primary nickel to the total nickel consumed by stainless steel producers). The world
production of stainless steel increased by nine per cent to approximately 22 million tonnes in
2003. Stainless steel production expanded in all major industrial regions and was particularly
strong in China and South Korea where new production facilities were commissioned during the year.
Nickel demand growth in non-stainless steel applications was relatively weak in 2003, as one
important end-use market, high nickel alloys for the aerospace industry, continued to struggle with
new aircraft orders remaining at relatively depressed levels. However, demand for nickel in
plating applications was relatively strong, led by growth in these applications in China, slightly
offset by reduced demand for these applications in Europe and the United States. The growth in world production of primary nickel in 2003 could not keep pace with the demand
growth experienced in 2003. Production of primary nickel in 2003 was adversely affected by the
labour disruption at our Ontario operations during a three-month period beginning June 1, 2003
which resulted in effectively no production from these operations which would normally produce
about 20 million pounds of primary nickel per month. We believe that several other major producers
failed to reach their 2003 projected production targets due to unexpected maintenance or
operational problems. The shortfall in production was partially offset by the release of
approximately 60,000 tonnes into the market during 2003, which nickel had been used as collateral
for a loan to one nickel producer. In addition, production of ferronickel in Australia, New
Caledonia, Colombia and the Dominican Republic increased in 2003. As a result, world primary
nickel production increased by 28,000 tonnes to 1,204,000 tonnes in 2003. World primary nickel
supply increased to 1,264,000 tonnes taking into account the release of the 60,000 tonne loan
collateral mentioned above. The significant growth in nickel demand during 2003, coupled with the limited supply growth,
created an underlying deficit between supply and demand in 2003 of approximately 40,000 tonnes.
With the release of the 60,000 tonne loan collateral referred to above, we believe there was a
surplus in the global nickel market of approximately 20,000 tonnes in 2003. Inventories of nickel
on the LME increased slightly during 2003 by 2,100 tonnes, remaining at a relatively low level of
24,072 tonnes at December 31, 2003. The LME cash nickel price opened the year 2003 at $7,210 per tonne ($3.27 per pound) and
extended the gains made in 2002 by increasing relatively steadily throughout the year. During the
first quarter, nickel prices initially rose due to strong demand from the stainless steel industry
and a reduction in LME inventories. During the second quarter, speculation that a strike at our
Ontario operations could occur followed by the actual strike was a contributing factor in the
movement of the nickel price to over $9,500 per 86




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tonne ($4.31 per pound). The announcement of the
release of the remaining tonnage of the loan collateral position was, we believe, sufficient to
cause the LME price to fall below $8,500 per tonne ($3.86 per pound) at the end of the second
quarter. The extended strike at our operations during the third quarter, accelerating demand and
the fall in LME inventories prompted, we believe, the release of the balance of the 60,000 tonne
loan collateral over a relatively short period of time in the third quarter. The LME cash price
ended 2003 at $16,650 per tonne ($7.55 per pound), an increase of 135 per cent compared with $7,100
per tonne ($3.22 per pound) at the end of 2002. 
 Results of Operations 
 2004 Compared with 2003 
 Earnings Summary The following bar chart describes the dollar impact (in millions of dollars) of the
principal factors, both favourable and unfavourable (unfavourable factors are shown in
parentheses), affecting our 2004 net earnings compared with 2003, with the starting point (first
bar on the left) being the level of net earnings for 2003: Principal Factors Affecting 2004 Net Earnings in Comparision with 2003(in millions of dollars) (BAR CHART)   *
    
    Reflects reduction in unfavourable currency adjustments from $177 million in 2003 to $85
million in 2004. Net earnings for 2004 were $612 million, or $3.22 per share ($2.99 per share on a diluted
basis), compared with net earnings of $153 million, or 68 cents per share (66 cents per share on a
diluted basis), in 2003. Results for 2004 included net income tax benefits totalling $23 million
and the following pre-tax items; (1) an asset impairment charge of $201 million related to the
write off of certain capitalized costs for our Goro nickel-cobalt project due to changes in project
scope and other factors, and (2) unfavourable non-cash currency translation adjustments of $85
million. The unfavourable non-cash currency translation adjustments were due to the effect of a
significant strengthening of the Canadian dollar relative to the U.S. dollar during the year
principally on Canadian dollar-denominated post-retirement benefit liabilities. Results for 2003 included net income tax benefits totalling $94 million and the following
pre-tax items: (1) unfavourable non-cash currency translation adjustments of $177 million, (2)
income of $24 million representing a milestone payment received as part of the terms of the sale of
a non-core exploration property in 1998, (3) a charge of $23 million for estimated remediation
costs for certain former industrial sites in the United States we retained relating to a business
sold in 1983, (4) an expense of $107 million associated with the three-month strike at our Ontario
operations and (5) currency hedging gains net of suspension costs relating to our Goro project of
$15 million. In addition, with respect to only the calculation of net earnings per share for 2003,
a premium of $15 million was paid on the May 1, 2003 redemption of our 5.5 per cent Convertible
Redeemable Preferred Shares Series E (Preferred Shares Series E). 87




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Nickel Production Nickel production increased by 27 per cent to 236,817 tonnes (522 million pounds) in
2004, our highest annual production ever, exceeding our previous record of 510 million pounds in
1974, compared with 187,173 tonnes (413 million pounds) in 2003, primarily reflecting higher
production at our Canadian and U.K. operations compared with 2003 when the three-month strike at
our Ontario operations that began on June 1, 2003 and a difficult ramp-up of operations in
September 2003 following the strike negatively affected production. PT Incos production increased
by about 4 million pounds to a record 159 million pounds of nickel in matte in 2004 compared with
155 million pounds of nickel in matte in 2003. Historically, we have believed that the minimum
finished nickel inventories we generally need to run our business and meet customers requirements
should be about 26,000 tonnes, depending upon the required product mix and other factors. We
expect to continue to evaluate the factors to be considered in determining what this minimum
inventory level should be. Finished nickel inventories were 27,334 tonnes at December 31, 2004
compared with 25,604 tonnes at the end of 2003 due to the timing of certain shipments in late 2004. 
 Copper Production Copper production increased by 37 per cent to 124,456 tonnes (274 million pounds) in 2004
compared with 91,134 tonnes (201 million pounds) in 2003 and 111,787 tonnes (246 million pounds) in
2002. Copper production in 2003 was also negatively impacted by the three-month strike at our
Ontario operations. 
 Net Sales The following table sets forth deliveries and net sales of our principal metal products
for the years indicated: Deliveries
    
    
    
    
    
    
    Deliveries
    
    
    
    
    
    
    Deliveries(tonnes except as
    
    
    Net Sales
    
    
    (tonnes except as
    
    
    Net Sales
    
    
    (tonnes except as
    
    
    Net Salesindicated)
    
    
    ($ millions)
    
    
    indicated)
    
    
    ($ millions)
    
    
    indicated)
    
    
    ($ millions)2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002Primary nickel,Including intermediatesInco-source
    
    
    235,185
    
    
    
    
    
    
    
    184,110
    
    
    
    
    
    
    
    212,247Purchased
    
    
    16,697
    
    
    
    
    
    
    
    29,780
    
    
    
    
    
    
    
    19,343251,882
    
    
    $
    3,503
    
    
    
    213,890
    
    
    $
    2,109
    
    
    
    231,590
    
    
    $
    1,654CopperInco-source
    
    
    124,884
    
    
    
    
    
    
    
    92,202
    
    
    
    
    
    
    
    110,019Purchased
    
    
    
    
    
    
    
    
    
    
    1,133
    
    
    
    
    
    
    
    3,097124,884
    
    
    
    364
    
    
    
    93,335
    
    
    
    171
    
    
    
    113,116
    
    
    
    184Cobalt
    
    
    1,542
    
    
    
    72
    
    
    
    903
    
    
    
    17
    
    
    
    1,582
    
    
    
    24Precious metals (in
thousands of troy
ounces)1
    
    
    2,490
    
    
    
    246
    
    
    
    1,694
    
    
    
    114
    
    
    
    2,072
    
    
    
    238Other
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    61Net Sales to customers
    
    
    
    
    
    $
    4,278
    
    
    
    
    
    
    $
    2,474
    
    
    
    
    
    
    $
    2,161
   1
    
    Excludes toll-refined materials. 88




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##### Table of Contents



Realized Prices The following table sets forth our average annual realized prices for the years indicated
for the metal products we produce and sell: ($ per tonne/per pound)
    
    2004
    
    
    2003
    
    
    2002Primary nickel, including intermediates
    
    $
    13,906/6.31
    
    
    $
    9,860/4.47
    
    
    $
    7,143/3.24Copper
    
    
    2,916/1.32
    
    
    
    1,832/0.83
    
    
    
    1,629/0.74Cobalt
    
    
    46,442/21.07
    
    
    
    18,846/8.55
    
    
    
    15,124/6.86($  per troy ounce)Platinum
    
    $
    762.73
    
    
    $
    588.96
    
    
    $
    545.92Palladium
    
    
    225.56
    
    
    
    297.36
    
    
    
    419.70Rhodium
    
    
    1,166.85
    
    
    
    530.66
    
    
    
    804.59Gold
    
    
    398.68
    
    
    
    367.72
    
    
    
    309.17Silver
    
    
    6.73
    
    
    
    4.86
    
    
    
    4.58
 Net sales increased substantially in 2004 due to higher selling prices for substantially all
the metals we produce, particularly for nickel and copper, as well as higher deliveries of
Inco-source nickel, copper, cobalt and platinum-group metals (PGMs). Deliveries of Inco-source
nickel in 2004 increased by 28 per cent compared with 2003 due to increased production at our
Canadian and U.K. operations as well as at PT Inco. Production for all metals for 2003 was
adversely affected by a three-month strike at our Ontario operations that began on June 1, 2003. Primary nickel sales increased by 66 per cent in 2004 from the previous year due to a 41 per
cent increase in our average realized nickel price and an 18 per cent increase in nickel deliveries
given the effect in 2003 of the three-month strike at our Ontario operations noted above on
deliveries. Our nickel deliveries in 2004 represented an estimated 20 per cent share of the world nickel
market, compared with 17 per cent in 2003 and 20 per cent in 2002. Our price realizations have tended to lag LME cash price changes. The premiums we realize
over the prevailing LME cash price for our specialty or value-added and other nickel products are
affected by (i) fluctuations in the LME cash nickel price, (ii) the effect these fluctuations have
on the price we receive for the nickel-in-matte product produced by PT Inco, (iii) the lag effect
that changes in the LME benchmark price have on the pricing of certain of our nickel products, (iv)
how certain of our nickel products are priced and (v) the mix of our primary nickel products sold
in the year. The average realized price for our primary nickel products, including intermediates,
was $13,906 per tonne ($6.31 per pound) in 2004, compared with the LME cash nickel price which
averaged $13,852 per tonne ($6.28 per pound). The average realized price for our primary nickel
products, including intermediates, was $9,860 per tonne ($4.47 per pound) in 2003, compared with
the LME cash nickel price which averaged $9,640 per tonne ($4.37 per pound). For the January 3 
March 11, 2005 period, the LME cash nickel price averaged $15,155 per tonne ($6.87 per pound) and
was $16,210 per tonne ($7.35 per pound) on March 11, 2005. The price realizations for our nickel and other metal products generally reflect LME or other
metal market prices and, over the longer term, depend principally upon the balance between demand
for our primary nickel products in the marketplace relative to supply available from us and our
competitors, including for this purpose, supply of secondary or scrap materials containing metals
in usable or recyclable form and supplies of other materials which do or may compete as substitutes
for nickel and our other metal products. As noted above, the availability of nickel-containing
stainless steel scrap, which competes directly with primary nickel as a source of nickel for use in
the production of stainless steel, is particularly important to stainless steel primary nickel
demand. The stainless steel scrap ratio was 47 per cent in 2004, compared with 44 per cent in 2003
and 45 per cent in 2002. In 2004, our copper sales increased by 113 per cent from the previous year due to a 34 per
cent increase in deliveries compared to the strike-affected levels for 2003 and a 59 per cent
increase in our average realized price. Sales of precious metals increased by 116 per cent in 2004
due to increased deliveries and increased selling prices in 2004 for substantially all of the
precious metals we produce. 89




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Costs and Expenses/Other Income The following table sets forth certain of our costs, principal expenses, other income,
income and mining taxes and minority interest for the years indicated: 2004
    
    
    2003
    
    
    2002($ millions)
    
    
    
    
    
    (Restated) 1
    
    
    (Restated) 1Cost of sales and other operating expenses
    
    $
    2,348
    
    
    $
    1,735
    
    
    $
    1,378Depreciation and depletion
    
    
    248
    
    
    
    227
    
    
    
    242Selling, general and administrative
    
    
    192
    
    
    
    169
    
    
    
    136Research and development
    
    
    29
    
    
    
    27
    
    
    
    17Exploration
    
    
    32
    
    
    
    27
    
    
    
    24Currency translation adjustments
    
    
    85
    
    
    
    177
    
    
    
    5Interest expense
    
    
    24
    
    
    
    44
    
    
    
    50Asset impairment charges
    
    
    201
    
    
    
    
    
    
    
    2,415Goro project suspension costs
    
    
    (1
    )
    
    
    (4
    )
    
    
    25Other income, net
    
    
    (48
    )
    
    
    (104
    )
    
    
    (40
    )Income and mining taxes
    
    
    430
    
    
    
    (37
    )
    
    
    (636
    )Minority interest
    
    
    126
    
    
    
    60
    
    
    
    22
   1
    
    Reference is made to note 2 to our 2004 consolidated financial statements. 
 Cost of Sales and Other Operating Expenses Cost of sales and other operating expenses increased by 35 per cent in 2004, reflecting
higher deliveries of the metals we produce, increased costs for and volumes of purchased nickel
intermediates processed, the adverse impact of a strengthening of the Canadian dollar relative to
the U.S. dollar on our costs incurred in Canadian dollars, higher spending on services and supplies
primarily as a result of increased production rates, higher employment costs associated with higher
earnings-based compensation payments, increased prices for heavy fuel oil used at PT Inco,
partially offset by cost reductions and related savings achieved in 2004. The cost of the nickel
intermediates we purchase is based upon LME and other benchmark prices and is included in cost of
sales. Results for 2003 included a pre-tax expense of $107 million associated with the three-month
strike at our Ontario operations. In addition, during the third quarter of 2003 our Ontario
operations experienced a series of unanticipated problems associated with the ramp-up of certain of
its facilities after the strike which resulted in an expense of $25 million. 
 Depreciation and Depletion Depreciation and depletion expenses increased in 2004 primarily due to higher depletion
expense at the Canadian operations as a result of increased production in 2004. At December 31, 2004, the net carrying value of property, plant and equipment under
construction or development not subject to depreciation or depletion was $5,226 million (2003 
$4,720 million; 2002  $4,109 million) which is comprised of amounts for the Voiseys Bay project
totalling $4,348 million (2003  $3,777 million; 2002  $3,299 million), the Goro project of $699
million (2003  $802 million; 2002  $637 million) and other assets under construction at our
operations of $179 million (2003  $141 million; 2002  $173 million). It is currently expected
that depreciation, depletion and amortization for the Voiseys Bay project will commence in 2005
and for the Goro project when operations start. Reference is made to 2005 Planned Capital
Expenditures below for information on certain expected depreciation, depletion and amortization
charges for the Voiseys Bay project. Reference is made to note 2 to our 2004 consolidated financial statements for a discussion
regarding a change in the calculation of depreciation and depletion expense effective January 1,
2004 which was applied on a retroactive basis. 
 Selling, General and Administrative Selling, general and administrative expenses increased by $23 million in 2004 compared with
2003. The increase was primarily due to higher expenses associated with our earnings-based
incentive compensation programs, partially offset by lower expenses associated with share
appreciation rights which historically had been granted as part of certain share option awards.
Selling, general and administrative expenses also included $6 million in 2004 spent on our program
to evaluate and report on our internal control over 90




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financial reporting under the U.S.
Sarbanes-Oxley Act and certain expenditures totalling $11 million in 2004 and $10 million in 2003
in support of the Goro and Voiseys Bay projects. 
 Currency Translation Adjustments Currency translation adjustments represented primarily the effect of exchange rate movements
on the translation of Canadian dollar-denominated liabilities, post-retirement benefits, accounts
payable and certain deferred income and mining taxes into U.S. dollars. Unfavourable currency
translation adjustments were primarily due to the strengthening of the Canadian dollar as of

December 31, 2004 relative to the U.S. dollar. The Canadian dollar  U.S. dollar exchange rate was
0.774 at year-end 2003 and 0.831 at year-end 2004, representing approximately a seven per cent
appreciation in the Canadian dollar relative to the U.S. dollar on a year-to-year basis. 
 Interest Expense Interest expense for 2004 declined compared with 2003, primarily as a result of an
increase in capitalized interest associated with our projects under development and lower interest
rates on our outstanding debt for 2004 compared with 2003, taking into account refinancing
activities in 2003 and our interest rate swaps we entered into with certain third party financial
institutions. Interest expense excluded capitalized interest of $65 million in 2004 compared with
$54 million in 2003. We expect that our total interest costs (expensed and capitalized) will
increase to approximately $130 million in 2005, with approximately $30 million of that amount
expected to be expensed and $100 million expected to be capitalized as part of our Goro and
Voiseys Bay projects. At December 31, 2004, approximately 51 per cent of our long-term debt reflected interest rates
that were subject to periodic adjustments based on market interest rates. Our long-term debt and
average effective interest rates at December 31, 2004 are summarized in note 11 to our 2004
consolidated financial statements. Reference is also made to Cash Flows, Liquidity and Capital
Resources  2004 Compared with 2003  Financing Activities below. 
 Asset Impairment Charges Changes in the planned Goro project configuration, including moving to direct heating of the
ore feed and other changes intended to reduce the projects capital cost and enhance the operating
efficiency of the planned process plant and the process to be used to recover metals, resulted in
certain capitalized costs incurred, principally for engineering and related work associated with
the original project configuration and for equipment purchased for the indirect heating of ore
feed, no longer having any use for the project or otherwise. As a result of these changes, an
impairment charge covering capitalized expenditures of $201 million before minority interest and
taxes was taken in the second quarter of 2004. 
 Other Income, Net Other income decreased in 2004, compared with 2003. In 2004, other income included gains
on foreign currency contracts in the amount of $10 million covering anticipated expenditures
relating to the Goro project. We also realized a gain of $6 million on the sale of our interest in
a Guatemalan subsidiary. In 2003, other income included gains of $35 million realized from the
sale or transfer of shares and other interests contributed to or received in conjunction with
strategic and other collaborations relating to our primary metals operations, the receipt of a
milestone payment of $24 million under the terms of sale reached in 1998 of a non-core exploration
property and net gains of $12 million in connection with derivative positions in metals intended to
meet future customer requirements. In addition, currency hedging gains of $11 million were
realized in 2003 on the closing out of certain forward currency contracts as a consequence of the
Goro project suspension. 
 Income and Mining Taxes Our effective tax rate for 2004 of 37 per cent was slightly lower than the statutory rate
due to (1) the benefit of losses not previously recognized, (2) the favourable outcome of tax
matters related to prior years and (3) the benefit of lower tax rates on profits earned in low tax
jurisdictions. These factors were partially offset by the negligible tax relief recorded on the
$201 million non-cash impairment charge, before minority interest and taxes, recorded in the second
quarter of 2004 and taxes provided on unrealized foreign exchange gains with respect to the
Canadian parents U.S. dollar-denominated debt. 91




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Minority Interest Our minority interest represents primarily the respective minority shareholders
interests in the earnings of PT Inco, Inco TNC Limited, Jinco Nonferrous Metals Co., Ltd. and Goro
Nickel S.A., the project company for the Goro project. Minority interest increased in 2004
compared with 2003 primarily due to the higher earnings at PT Inco as a result of higher average
realized prices for and higher deliveries of nickel-in-matte produced by PT Inco. 
 Nickel Unit Cash Cost of Sales The following bar chart shows the principal factors (on a per pound basis), both
favourable and unfavourable (favourable factors are shown in parentheses), affecting our 2004
nickel unit cash cost of sales after by-product credits, with the starting point (first bar on the
left) being our nickel unit cash cost of sales after by-product credits for 2003: Principal Factors Affecting Our Nickel Unit Cash Costs of Sales After By-Product Credits in
Comparison with 2003 (BAR CHART)   (1)
    
    Other factors include primarily higher earnings-based compensation payments
and higher levels of supplies, services and contracts expenditures, partially
offset by the absence of the ramp-up issues experienced in the third quarter of
2003. Since this measure captures our key costs of production and the impact of prices for our
by-products, nickel unit cash cost of sales represents a key performance measurement that
management uses to manage our costs and operations. Nickel unit cash cost of sales before
by-product credits, representing a calculation equal to the total of all cash costs incurred to
produce a unit of nickel before the deduction of contributions from by-products sold divided by
Inco-source nickel deliveries, increased to $5,732 per tonne ($2.60 per pound) in 2004 from $4,453
per tonne ($2.02 per pound) in 2003. Nickel unit cash cost of sales after by-product credits
increased to $5,115 per tonne ($2.32 per pound) in 2004 from $4,740 per tonne ($2.15 per pound) in
2003. The 2004 increase in nickel unit cash cost of sales before by-product credits was principally
due to the higher cost for, and volumes of, purchased nickel intermediates, the higher average
Canadian dollar exchange rate relative to the U.S. dollar exchange rate compared with 2003, higher
costs for heavy oil at PT Inco, higher spending on supplies and services primarily as a result of
increased production rates and higher earnings-based compensation payments, partially offset by the
absence of ramp-up costs which we incurred in the third quarter of 2003 after the end of the strike
at our Ontario operations, and the cost reductions and related savings as discussed below. The increase in nickel unit cash cost of sales after by-product credits for 2004 compared with
2003 was due to higher nickel unit cash cost of sales before by-product credits, partially offset
by higher by-product credits as a result of higher realized selling prices for and higher
deliveries of our principal by-products. As discussed above, we use purchased nickel intermediates to increase processing capacity
utilization at our Canadian operations. While the cost of purchased nickel intermediates is higher
than that for processing our own mine production and such costs increase as 92




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the prevailing prices,
LME cash nickel or other benchmark prices, on which basis this material is purchased by us
increases, the price realizations are also higher, resulting in margins on these purchases
remaining relatively unchanged. A reconciliation of our nickel unit cash cost of sales before and after by-product credits to
cost of sales under Canadian GAAP is shown in the table entitled Reconciliation of Nickel Unit
Cash Cost of Sales Before and After By-Product Credits to Canadian GAAP Cost of Sales under
Non-GAAP Financial Measure below. In 2004, we realized cost reductions and related savings of $59 million. We are currently
targeting a further $60 million in cost reductions in 2005. 
 Energy Costs and Relative Advantages Energy costs are a significant component of production costs in the nickel industry since
nickel production is very energy-intensive, especially with respect to the costs of processing
lateritic ores such as those processed at our PT Inco operations. We enjoy relatively low energy
costs because of substantial production from our Canadian sulphide ores, which generally consume
only about one-fifth of the energy required to process lateritic ores. In addition, low-cost
energy is available from our hydroelectric facilities in Ontario and at PT Incos lateritic mining
operations in Indonesia, and from purchased hydroelectric power at our Manitoba operations. In 2004, our hydroelectric facilities in Ontario generated approximately 19 per cent of our
Ontario operations electricity requirements, and PT Incos 165-megawatt hydroelectric
generating-facility at Larona together with its 93-megawatt hydroelectric generating facility at
Balambano generated virtually all of PT Incos 2004 electricity requirements. The Balambano
facility has been able to generate power consistently above its design capacity due to improved
water management practices and higher reservoir levels and other related factors than were assumed
in developing its original design capacity. In 2004, energy costs at our Ontario and Manitoba
operations were approximately 12 per cent of total cash production costs, compared with 34 per cent
for PT Inco. The availability of captive hydroelectric power decreased cash energy costs at PT
Inco by about 53 per cent in 2004 and 51 per cent in 2003 relative to the energy costs that would
have been incurred by PT Inco if its operations were dependent on fuel oil as the sole source to
meet its energy requirements. 
 Intermediates Segment Our intermediates segment comprises the mining and processing operations of PT Inco in
Indonesia where nickel-in-matte, an intermediate product, is produced and sold primarily into the
Japanese market. Net sales by PT Inco of nickel-in-matte were $792 million in 2004 compared with
$509 million in 2003. This increase in 2004 relative to 2003 was due to higher realized prices and
increased deliveries as a result of record high production. PT Incos deliveries of
nickel-in-matte totalled 72,500 tonnes in 2004 compared with 70,500 tonnes in 2003. The increase
in 2004 compared with 2003 was due to higher production. PT Incos net realized price for
nickel-in-matte in 2004 averaged $10,766 per tonne ($4.88 per pound) compared with $7,117 per tonne
($3.23 per pound) in 2003. The selling price of PT Incos nickel-in-matte is determined by a
formula which is based upon the LME cash price for nickel. All of PT Incos production is sold in
U.S. dollars under long-term contracts with us and with Sumitomo Metal Mining Co., Ltd. Nickel-in-matte production at PT Inco increased by three per cent to 72,200 tonnes in 2004
from 70,200 tonnes in 2003. Nickel unit cash cost of sales increased by 15 per cent in 2004
compared with 2003 due to increases in the price of heavy fuel oil as well as greater usage of
mining-related services due to the higher production levels. In order to increase production in
favourable nickel markets, we augmented PT Incos hydroelectric power generation by increasing the
utilization of more expensive fuel-oil based power sources. PT Incos energy costs were up in 2004
due to increased consumption of heavy fuel oil as a result of the higher production rates and
higher prices paid for such fuel oil to operate its dryers, kilns and other oil-fired facilities.
Fuel oil costs were up 9 per cent in 2004 from 2003. Fuel oil represented about 27 per cent of PT
Incos cash costs of production of nickel-in-matte in 2004 compared with 31 per cent in 2003. 
 Development Projects Segment Our development projects include the Voiseys Bay nickel-copper-cobalt project in the
Province of Newfoundland and Labrador and the Goro nickel-cobalt project in New Caledonia. 93




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Voiseys Bay Project We continued to make progress on the Voiseys Bay project in 2004 towards the start-up of
commercial production. The project completion date for the initial phase, including the open pit
mine, concentrator and demonstration plant to test hydrometallurgical processes, was advanced by
six months from the original schedule established, with the first shipment of concentrate currently
planned for November 2005 and initial finished nickel production from the Voiseys Bay concentrate
in early 2006. Work also advanced in 2004 to prepare our Ontario and Manitoba operations to
receive and process the nickel concentrate from Voiseys Bay. During 2004, testing of hydrometallurgical processes to treat the Voiseys Bay ores as part of
the research and development program covering those processes continued and design work on the
demonstration plant to be constructed to advance the testing of those processes was completed.
Site construction for the demonstration plant in Argentia, Province of Newfoundland and Labrador is
proceeding on plan and that facility is expected to be ready to receive the first nickel
concentrate in late 2005. Goro Project In late September 2004, we essentially completed the second phase, or Phase 2, of the
comprehensive review of the Goro project that established an innovative, value-improvement program
for the project, reconfiguring the originally proposed plant layout and other aspects of the
project, and reducing the amounts of earthmoving, concrete and structural steel requirements,
resulting in a $500 million reduction in the capital cost estimate from previous estimates.
Additionally, as part of that Phase, a technical and process review recommended that direct heating
of the slurry in the autoclave area of the planned process plant be adopted in the process design
and that certain other changes be made to increase the process plants throughput capacity. As a
result of the revised project scope, however, we recorded a write-down, as discussed above, of $201
million in previously capitalized costs in the second quarter of 2004. In October 2004, we announced the decision to proceed with the project. It is currently
expected that the projects execution plan will be based upon a phased approach, with the first
phase focusing on engineering, contract development and permitting. Engineering work has
progressed well and fieldwork is expected to commence in the second quarter of 2005. It is
currently expected that the project will commence production in the latter part of 2007. 
 2003 Compared with 2002 
 Earnings Summary Net earnings for 2003 were $153 million, or 68 cents per share (66 cents per share on a
diluted basis), compared with a net loss of $1,477 million, or $8.24 per share ($8.24 per share on
a diluted basis), in 2002. Results for 2003 included net income tax benefits totalling $94 million
and the following items, before taxes: (1) unfavourable non-cash currency translation adjustments
of $177 million, (2) income of $24 million representing a milestone payment received as part of the
terms of the sale of a non-core exploration property in 1998, (3) a charge of $23 million for
estimated remediation costs for certain former industrial sites in the United States we retained
relating to a business sold in 1983, (4) expense of $107 million associated with the three-month
strike at our Ontario operations, (5) currency hedging gains net of suspension costs relating to
the Goro project of $15 million, (6) income of $7 million associated with a tax refund and (7) a
loss of $2 million realized on the redemption of certain convertible debt securities. In addition,
with respect to only the calculation of net earnings per share for 2003, a premium of $15 million
was paid on the May 1, 2003 redemption of our Preferred Shares Series E. The unfavourable non-cash
currency translation adjustments of $177 million in 2003 referred to above were due to the effect
of a significant strengthening of the Canadian dollar relative to the U.S. dollar during the period
on Canadian dollar-denominated liabilities. The net income tax benefits totalling $94 million are
discussed under Income and Mining Taxes below. The strike expenses referred to above are those
ongoing costs, such as salaries and certain employment benefits, depreciation, property taxes,
utilities and maintenance incurred during the strike period, in this case, the three-month strike
at our Ontario operations which began on June 1, 2003, which would normally be treated as
production costs and charged to inventory but, in the absence of production, have been expensed.
Results for 2002 included non-cash pre-tax asset impairment charges of $2,415 million to reduce the
carrying value of the Voiseys Bay project and certain other assets, suspension costs relating to
the Goro project of $25 million, interest income of $14 million associated with a tax refund and
unfavourable non-cash currency translation adjustments of $5 million. 94




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Nickel Production Nickel production decreased by 11 per cent to 187,173 tonnes (413 million pounds) in
2003, compared with 209,728 tonnes (462 million pounds) in 2002, reflecting lower production at our
Ontario operations due to the three-month strike and the ramp-up problems noted above, partially
offset by higher production at our Manitoba operations, the processing of higher volumes of
purchased nickel intermediates at both the Ontario and Manitoba operations and higher ore grades
and higher production levels at PT Inco. Our 2002 results were negatively impacted by a planned
furnace rebuild at PT Inco which resulted in lower production for this operation. Finished nickel
inventories were 25,604 tonnes at December 31, 2003, compared with 23,126 tonnes at the end of
2002. 
 Copper Production Copper production decreased by 18 per cent to 91,134 tonnes in 2003 compared with 111,787
tonnes in 2002. Copper production in 2003 was below our planned target of 113,000 tonnes due to
lower production at the Ontario operations as a result of the strike and ramp-up problems noted
above. 
 Net Sales Net sales to customers for 2003 increased by 14 per cent from the previous year due to
significantly higher average realized prices for nickel which were partially offset by lower
deliveries of nickel, platinum, palladium, copper and cobalt, and lower realized prices for certain
PGMs. The decrease in deliveries was primarily due to lower production at our Ontario operations
as a result of the three-month strike which was partially offset by higher nickel deliveries from
PT Inco and our Manitoba operations and an increase in the deliveries of purchased finished nickel. Primary nickel sales increased by 28 per cent in 2003 from the previous year due to a 38 per
cent increase in our average realized nickel price partially offset by an eight per cent decrease
in nickel deliveries primarily due to the three- month strike at our Ontario operations. Our nickel deliveries in 2003 represented an estimated 17 per cent share of the world nickel
market, compared with 20 per cent in 2002. In 2003, copper sales decreased by seven per cent from the previous year due to a 17 per cent
decline in deliveries due primarily to the three-month strike at our Ontario operations, partially
offset by a 12 per cent increase in our average realized price. Sales of precious metals decreased
by 52 per cent in 2003 due to lower deliveries from decreased production also due primarily to that
three-month strike. 
 Cost of Sales and Other Operating Expenses Cost of sales and other operating expenses increased by 26 per cent in 2003, reflecting
the adverse impact of a strengthening of the Canadian dollar relative to the U.S. dollar on our
costs incurred in Canadian dollars, higher energy costs, higher employment and pension costs, and
increased costs for purchased intermediates processed. In addition, deliveries of purchased
finished nickel in 2003 increased by 54 per cent primarily due to increases in the purchases of
this material to meet customer requirements as a result of the strike at our Ontario operations.
The cost of these purchases is based upon LME and other benchmark prices and is included in cost of
sales. Operating results for 2003 included a pre-tax expense of $107 million associated with the
three-month strike at our Ontario operations. In addition, during the third quarter of 2003 our
Ontario operations experienced a series of unanticipated problems associated with the ramp-up of
certain of its facilities after the strike. These problems included outages or curtailments of
operations at the oxygen plants and acid plant at those operations. These problems resulted in
lower than planned production of in-process and finished material, including PGMs from our own ores
in Ontario, and an expense of $25 million was incurred during the third quarter of 2003 due to this
production shortfall. 
 Selling, General and Administrative Selling, general and administrative expenses totalled $169 million in 2003 compared with
$136 million in 2002. The increase was primarily due to higher common share appreciation rights
expense in connection with certain share option grants as a result of the significant increase in
the price of our common shares in 2003. Common share appreciation rights expense was $36 million
in 2003 compared with $7 million in 2002. Selling, general and administrative expenses also
included certain expenditures totalling approximately $10 million in both 2003 and 2002 in support
of our Goro and Voiseys Bay projects. 95




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Research and Development Research and development expenses increased to $27 million in 2003 from $17 million in
2002. The increase was primarily due to higher spending on the hydrometallurgical processing
research and development program as part of the initial phase of our Voiseys Bay project. 
 Currency Translation Adjustments Currency translation adjustments represented primarily the effect of exchange rate movements
on the translation of Canadian dollar-denominated liabilities, post-retirement benefits, accounts
payable and certain deferred income and mining taxes, into U.S. dollars. Unfavourable currency
translation adjustments of $177 million in 2003 were due to the significant strengthening of the
Canadian dollar relative to the U.S. dollar during these periods. The Canadian dollar  U.S.
dollar exchange rate was 0.633 at year-end 2002 and 0.774 at year-end 2003, representing
approximately a 22 per cent appreciation in the Canadian dollar relative to the U.S. dollar on a
year-to-year basis. 
 Interest Expense Interest expense for 2003 was $44 million compared with $50 million in 2002. Interest paid in
2003 was higher due to the increase in our outstanding debt levels during the year. However, this
increase was offset by an increase in capitalized interest associated with our projects under
development and by lower interest rates on our outstanding debt for 2003 compared with 2002, taking
into account our interest rate swaps. Interest expense excluded capitalized interest of $54
million in 2003 compared with $27 million in 2002. 
 Goro Project Suspension Costs In 2003, we incurred expenses of $17 million in connection with the ongoing care and custody
costs associated with the construction site at our Goro project while the comprehensive project
review was being conducted. These expenses were offset by a gain of $21 million which we recorded
on forward currency contracts which had been entered into to hedge certain of the projects capital
costs expected to be incurred in Euros and other currencies. These contracts became ineffective
since they no longer matched the original timing of expenditures due to delays in project
expenditures during 2003. 
 Other Income, Net Other income increased to $104 million in 2003, compared with $40 million in 2002, due to
gains of $35 million realized from the sale or transfer of shares and other interests contributed
to or received in conjunction with strategic and other collaborations relating to our primary
metals operations, the receipt of a milestone payment of $24 million under the terms of sale
reached in 1998 of a non-core exploration property and net gains of $12 million in connection with
derivative positions in metals intended to meet future customer requirements. In addition,
currency hedging gains of $11 million were realized on the closing out of certain forward currency
contracts as a consequence of the Goro project suspension. These gains were partially offset by a
loss of $2 million on the May 1, 2003 redemption of our 53/4% Convertible Debentures due 2004 and
lower interest income as a result of interest received on a tax refund being lower during 2003
compared with the interest on tax refunds received during 2002. 
 Income and Mining Taxes Income and mining taxes for 2003 included a benefit of $106 million resulting from a reduction
in the Canadian federal tax rate, partially offset by a $20 million charge for an increase in the
future tax rates in the Province of Ontario. We also benefitted from favourable tax rulings and
other decisions on tax matters from Canadian and other jurisdictions concerning the tax treatment
of certain prior period transactions in the amount of $56 million as well as the favourable impact
of net non-taxable gains and higher earnings at PT Inco, which are taxed at a relatively lower rate
than earnings in other jurisdictions. Partially offsetting these tax benefits was the accrual for
additional tax expense of $48 million due to the strengthening of the Canadian dollar relative to
the U.S. dollar. 96




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Minority Interest Minority interest increased to $60 million in 2003 compared with $22 million in 2002. This
increase in 2003 relative to 2002 was due primarily to the higher earnings at PT Inco as a result
of higher average realized prices for and higher deliveries of nickel-in-matte produced by PT Inco. 
 Nickel Unit Cash Cost of Sales Nickel unit cash cost of sales before by-product credits, increased to $4,453 per tonne
($2.02 per pound) in 2003 from $3,483 per tonne ($1.58 per pound) in 2002. Nickel unit cash cost
of sales after by-product credits increased to $4,740 per tonne ($2.15 per pound) in 2003 from
$3,197 per tonne ($1.45 per pound) in 2002. The increase in nickel unit cash cost of sales both before and after by-product credits in
2003 was due to the unfavourable effect of the strengthening of the Canadian dollar relative to the
U.S. dollar on our costs incurred in Canadian dollars, higher energy costs at PT Inco and our
Ontario operations, higher employment and pension costs, higher costs for purchasing and processing
larger volumes of purchased nickel intermediates, the ramp-up problems experienced at our Ontario
operations after the three-month strike discussed above, and, in the case of nickel unit cash cost
of sales after by-product credits, lower contributions from by-products primarily resulting from
lower deliveries of PGMs. A reconciliation of our nickel unit cash cost of sales before and after by-product credits to
cost of sales under Canadian GAAP is shown in the table Reconciliation of Nickel Unit Cash Cost of
Sales Before and After By-Product Credits to Canadian GAAP Cost of Sales under Non-GAAP Financial
Measure below. 
 Energy Costs and Relative Advantages In 2003, our hydroelectric facilities in Ontario generated approximately 22 per cent of
our Ontario operations electricity requirements, and PT Incos 165-megawatt hydroelectric
generating facility at Larona together with its 93-megawatt hydroelectric generating facility at
Balambano generated virtually all of PT Incos 2003 electrical requirements. In 2003, energy costs
at our Ontario and Manitoba operations were approximately 14 per cent of total cash production
costs, compared with 36 per cent for PT Inco. The availability of captive hydroelectric power
decreased cash energy costs at PT Inco by about 51 per cent in 2003 and 47 per cent in 2002
relative to the energy costs that would have been incurred by PT Inco if its operations were
dependent on fuel oil as the sole source to meet its energy requirements. 
 Intermediates Segment Our intermediates segment comprises the mining and processing operations of PT Inco in
Indonesia where nickel-in-matte, an intermediate product, is produced and sold primarily into the
Japanese market. Net sales by PT Inco of nickel-in-matte were $509 million in 2003 compared with
$321 million in 2002. This increase in 2003 relative to 2002 was due to increased deliveries as a
result of higher production rates and higher realized prices. PT Incos deliveries of
nickel-in-matte totalled 70,500 tonnes in 2003 compared with 61,900 tonnes in 2002. The increase
in 2003 compared with 2002 was due to higher production. PT Incos net realized price for
nickel-in-matte in 2003 averaged $7,117 per tonne ($3.23 per pound) compared with $5,114 per tonne
($2.32 per pound) in 2002. The selling price of PT Incos nickel-in-matte is determined by a
formula based on the LME cash price for nickel. Nickel-in-matte production at PT Inco increased by 18 per cent to 70,200 tonnes in 2003 from
59,500 tonnes in 2002, reflecting the processing of higher-grade ore in 2003 compared with 2002 and
higher production rates. In addition, 2002 production at PT Inco was adversely affected by a
planned furnace rebuild at PT Inco. Cash cost of sales increased in 2003 compared with 2002 due to
the increased production volumes and higher costs due to increased consumption of fuel oil as a
result of the higher production rates and higher prices paid for heavy fuel oil to operate its
dryers, kilns and its other oil-fired facilities. Fuel oil costs were up 48 per cent in 2003 from
2002. Heavy fuel oil represented about 31 per cent of PT Incos cash costs of production of
nickel-in-matte in 2003 compared to 28 per cent in 2002. In addition, PT Inco incurred additional
costs for equipment rentals, employment and maintenance costs to achieve its higher production
rates in 2003. 97




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Cash Flows, Liquidity and Capital Resources 
 2004 Compared with 2003 
 Operating Activities Net cash provided by operating activities in 2004 totalled $1,393 million, which
represented a significant increase from the $131 million in net cash provided by operating
activities in 2003. The increase was primarily due to higher earnings, excluding asset impairment
and other non-cash charges, and a reduction in working capital in 2004, compared with an increase
in working capital in 2003. Increased investments in accounts receivable and inventories in 2004
were more than offset by higher balances of income and mining taxes payable in 2004. Accounts
receivable at the end of 2004 increased due to significantly higher deliveries and prices in the
fourth quarter of 2004 relative to the corresponding period of 2003. Our investment in inventory
increased at the end of 2004 relative to 2003 due principally to higher production costs associated
with that inventory. In 2004, working capital primarily benefitted from the delay in the payment
of accrued income and mining tax liabilities as the minimum required income and mining tax
instalments during the year were less than the amount of the full tax obligation ultimately payable
in respect of 2004. The balance of tax payments in respect of 2004 of approximately $240 million
will be made in the first quarter of 2005. In 2004, pension payments totalled $265 million which
was a significant increase compared with 2003 as a result of voluntary contributions in the amount
of $144 million in addition to required contributions totalling $121 million. We have had in effect for a number of years defined benefit pension plans principally in
Canada, the United States and the United Kingdom. Each of the jurisdictions in which these plans
are located has legislation and regulations which, among other statutory requirements, cover the
minimum contributions to be made to these plans to meet their potential liabilities as calculated
in accordance with such legislation and regulations. Based upon the value of the assets in these
plans, as determined pursuant to applicable provincial legislation and regulations in Canada and
other factors to be taken into account under such legislative or regulatory requirements, we, in
accordance with such applicable legislation or regulations, and in light of our strong financial
position, increased our voluntary contributions to such plans such that our total contributions
were $265 million for 2004 compared with $142 million in 2003. Voluntary contributions included in
the total contributions were $144 million in 2004 and $40 million in 2003. We currently expect
that our annual pension contributions will be approximately $160 million in 2005, including
voluntary contributions of $14 million. Since the liabilities associated with these pension plans
are affected by changes in certain exchange rates, primarily the Canadian dollar, changes in such
exchange rates could also significantly affect the level of contributions for future years. 
 Investing Activities Net cash used for investing activities increased to $881 million in 2004 compared with
$565 million in 2003. The increase was primarily due to higher capital spending, mainly in respect
of our Voiseys Bay project, compared with 2003. Reference is made to Risks and Uncertainties 
Other Risks and Uncertainties  Capital Requirements and Operating Risks below for a discussion of
the risks associated with our capital requirements. The following table sets forth our capital
expenditures by principal operations for the years indicated: ($ millions)
    
    2004
    
    
    2003
    
    
    2002Ontario operations
    
    $
    152
    
    
    $
    101
    
    
    $
    90Manitoba operations
    
    
    42
    
    
    
    50
    
    
    
    32PT Inco
    
    
    79
    
    
    
    45
    
    
    
    42Goro project
    
    
    138
    
    
    
    249
    
    
    
    353Voiseys Bay project
    
    
    447
    
    
    
    138
    
    
    
    73Other
    
    
    18
    
    
    
    8
    
    
    
    10Total
    
    $
    876
    
    
    $
    591
    
    
    $
    600
 During 2004, we used cash of $28 million to acquire two percent of the shares of PT Inco,
increasing our interest to approximately 61 per cent. Total capital expenditures for 2005 are currently projected to be $1,450 million before any
funding that may be provided by new shareholders in Goro Nickel S.A., the Goro project company, and
certain previously announced government assistance relating to our development projects. 98




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Financing Activities Net cash provided by financing activities in 2004 was $146 million compared with cash
used for financing activities in 2003 of $235 million. We received $41 million in respect of the French government-sponsored financing for the Goro
project as described in note 14 to our 2004 consolidated financial statements. The table below summarizes our long-term borrowings and repayments/redemptions of our
long-term debt in 2004, 2003 and 2002: ($ millions)
    
    2004
    
    
    2003
    
    
    2002Long-term borrowingsTerm loan
    
    $
    200
    
    
    
    
    
    
    
    5.70% Debentures due 2015
    
    
    
    
    
    
    300
    
    
    
    7.75% Notes due 2012
    
    
    
    
    
    
    
    
    
    
    4007.20% Debentures due 2032
    
    
    
    
    
    
    
    
    
    
    400PT Inco loan facilities
    
    
    
    
    
    
    
    
    
    
    42Other
    
    
    5
    
    
    
    14
    
    
    
    42Total
    
    $
    205
    
    
    
    314
    
    
    
    884Repayments of long-term debt5 3/4% Convertible Debentures due 2004
    
    $
    
    
    
    
    (173
    )
    
    
    7 3/4% Convertible Debentures due 2016
    
    
    
    
    
    
    (145
    )
    
    
    9.60% Debentures due 2022
    
    
    
    
    
    
    (159
    )
    
    
    PT Inco loan facilities
    
    
    (85
    )
    
    
    (82
    )
    
    
    (66
    )9.875% Debentures
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    (15
    )
    
    
    (15
    )
    
    
    (15
    )Total
    
    $
    (100
    )
    
    
    (574
    )
    
    
    (81
    )
 To continue to provide liquidity for our operations, in late May 2004 we concluded a new $750
million syndicated revolving credit facility that matures on May 28, 2009. This syndicated
facility replaced several bilateral bank credit agreements under which we had an aggregate of $680
million of available credit as of year-end 2003, where $273 million of such $680 million would have
otherwise expired on June 1, 2004 and the balance in either June 2005, June 2006 or June 2007.
Subject to the approval of the lenders representing not less than 66 2/3 per cent in total commitments
under this new syndicated facility, the initial May 28, 2009 maturity date may be extended for the
commitments of those lenders who have approved such extension for an additional one-year period on
each May 28 anniversary date, beginning May 28, 2005. The borrowings under the facility may be
made in either Canadian dollars in the form of (a) loans based on the prime rate or (b) bankers
acceptances or in United States dollars in the form of (i) loans based upon a U.S. dollar base rate
or (ii) loans based upon London interbank offered rates (LIBOR). Borrowings under the facility
bear interest, when drawn, at a rate which varies based on the type of borrowing and our credit
ratings at the time of borrowing. As of December 31, 2004, there were no amounts drawn under this
facility. This credit facility provides that, so long as advances are outstanding or any letters
of credit or guarantees issued pursuant to the terms of the credit facility are outstanding, we
will be required to maintain a ratio of Consolidated Indebtedness, as defined in the credit
facility, to Tangible Net Worth, as defined in the credit facility, not to exceed 50:50. At
December 31, 2004 the ratio of Consolidated Indebtedness to Tangible Net Worth was 25:75. The
credit facility does not require any acceleration or prepayment of outstanding balances if our
credit ratings on outstanding debt securities were downgraded or if there were a significant
decline in our earnings, cash flow or in the price of our publicly traded common shares or other
equity securities. A downgrade in our ratings would, however, increase the interest rate payable
under the facility and, conversely, any upgrade in our ratings would reduce the interest rate
payable. In late December 2004 we concluded a new $400 million term loan facility. Borrowings under
this facility may be made up to December 23, 2005 and the amount of the loan available will be
reduced to the aggregate amount of the advances at that date (the Final Loan Amount). Repayments
of the Final Loan Amount outstanding at December 23, 2005 are as follows  25 per cent of the Final
Loan Amount will be due on December 31, 2009; 12 1/2 per cent of the Final Loan Amount on June 30,
2010; 12 1/2 per cent of the Final Loan Amount on December 31,
2010; 12 1/2 per cent of the Final Loan
Amount on June 30, 2011; and the remaining amount still outstanding on the final maturity date of
December 23, 2011. The borrowings under this facility may be made in United States dollars in the
form of (i) loans based on a U.S. dollar base rate or (ii) loans based on certain London interbank
offered rates. Borrowings 99




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under this facility bears interest, when drawn, at rates which vary
based on the type of borrowing and our credit ratings at the time of borrowing. As of December 31,
2004, there was $200 million drawn under this new facility. This new facility and the drawdown of
$200 million under that facility was part of the financing plan for our capital expenditure program
for our Goro project intended to optimize certain tax benefits relating to the recently completed
Girardin Act financing for this project as described in note 14 to our 2004 consolidated financial
statements. This new term loan facility provides that, so long as advances are outstanding, we
will be required to maintain a ratio of Consolidated Indebtedness, as defined in the term loan
facility, to Tangible Net Worth, as defined in the term loan facility, not to exceed 50:50. At
December 31, 2004 the ratio of Consolidated Indebtedness to Tangible Net Worth was 25:75. The new
term loan facility does not require any acceleration or prepayment of outstanding balances if our
credit ratings on outstanding debt securities were downgraded or if there were a significant
decline in our earnings, cash flow or in the price of our publicly traded common shares or other
equity securities. A downgrade in our ratings would, however, increase the interest rate payable
on borrowings under the facility and, conversely, any upgrade in our ratings would reduce the
interest rate payable on borrowings. As of December 31, 2004, our outstanding debt securities were rated as investment grade by
Moodys Investors Service and Standard & Poors, with the specific ratings being Baa3 (stable
outlook) by Moodys Investors Service and BBB (positive outlook) by Standard & Poors. Our total debt as a percentage of our total debt plus shareholders equity as of December 31
for the years indicated is set forth in the following table: December 31
    
    2004
    
    
    2003
    
    
    2002Total debt as % of total debt plus shareholders equity
    
    
    27
    %
    
    
    28
    %
    
    
    30
    %
 Recognizing the sensitivity of our cash flow to nickel and other metals prices, we currently
believe that our level of cash and cash equivalents as of December 31, 2004, together with
currently projected cash to be provided by operating activities, available cash from our unused
lines of credit and new term loan facility and access to international capital markets, will be
more than sufficient to meet our currently anticipated cash requirements at least for the 2005-2007
period. These requirements include ongoing cash needs for our operations as well as the cash
required to finance currently planned expenditures on sustaining and other capital projects,
including our Voiseys Bay and Goro projects. As discussed above, our required capital
expenditures are very significant over the 2005-2007 period given the current spending plans for
our Voiseys Bay and Goro projects and at PT Inco. Our liquidity is affected by a number of key factors, including decreases in the amount of,
and a change in the timing of, our production outlook at our existing operations as well as the
timing of completion of our Voiseys Bay and Goro projects. Reference is made to Risks and
Uncertainties  Other Risks and Uncertainties  PT Inco, Risks and Uncertainties  Other Risks
and Uncertainties  Risks Associated with, and Importance of, Future Low-Cost Nickel Projects and
Risks and Uncertainties  Other Risks and Uncertainties  Uncertainty of Production and Capital
and Other Cost Estimates below for detailed discussions of these factors and their impact on our
liquidity. 
 2003 Compared with 2002 
 Operating Activities Net cash provided by operating activities in 2003 totalled $131 million, which
represented a significant decrease from the $599 million in net cash provided by operating
activities in 2002. During 2003, increased cash was required for working capital due to higher
accounts receivable, higher inventories and lower income and mining taxes payable in 2003 compared
with the prior year, with this increased cash requirement having been partially offset by higher
accounts payable and accrued liabilities. Accounts receivable increased primarily due to
significantly higher selling prices for our finished nickel products and, to a lesser degree, due
to higher deliveries of our finished nickel products in the fourth quarter of 2003 compared with
the fourth quarter of 2002. Inventories were higher at the end of 2003 compared with 2002 due to
higher volumes of both finished and in-process nickel on hand at the end of the year, as well as
higher costs. The higher costs were due, in part, to the strengthening of the Canadian dollar
relative to the U.S. dollar in 2003, higher costs for the post-retirement benefits we provide,
higher energy costs as a result of the increased utilization rates and costs for natural gas and
heavy oil and higher costs for purchased nickel intermediates during the fourth quarter of 2003
given that these intermediates are priced based upon LME and other benchmark prices. Income and
mining taxes payable declined during 2003 as a result of higher tax payments during the year, the
majority of which payments related to taxes paid of $96 million in respect of 2002. Accounts
payable and accrued liabilities were significantly higher at the end of 2003 as a result of the
increases related to the 100




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accrual for stock appreciation rights, the accrual for estimated
remediation costs for certain former industrial sites in the United States and the impact of the
strengthening of the Canadian dollar because a significant portion of our accounts payable is
denominated in Canadian dollars. As a result of the timing of our normal tax payments, tax
payments totalling $12 million in respect of 2003 were made in the first quarter of 2004 versus $88
million in 2003. 
 Investing Activities Net cash used for investing activities decreased to $565 million in 2003 compared with
$609 million in 2002. The decrease was primarily due to lower capital spending, mainly in respect
of our Goro project which was partially offset by higher capital spending in respect of our
Voiseys Bay project, compared with 2002. 
 Financing Activities Net cash used for financing activities in 2003 of $235 million was significantly lower
than the cash provided by financing activities in 2002 of $791 million, which was primarily due to
the call and repayment of $574 million of debt securities and the optional redemption of $487
million for our Preferred Shares Series E, including the redemption premium, which was partially
offset by the cash provided from new borrowings as described below, as well as cash received from
the issuance of common shares upon exercise of employee stock options. In addition to the long-term borrowings and repayments discussed in the above chart, in 2003
we issued $476 million in convertible debt for net proceeds of $470 million, of which $114 million
was initially recorded as debt and the remainder of $356 million was recorded as equity in
accordance with Canadian GAAP. In September 2003, we completed an underwritten public offering in the United States of $300
million aggregate principal amount of 5.70% Debentures due 2015. The net proceeds from this
offering were approximately $297 million after underwriting commissions and other expenses and were
used, together with available cash, to redeem our 7 3/4% Convertible Debentures due 2016 in the amount
of $145 million and our 9.60% Debentures due 2022 in the amount of $159 million as discussed below. In March 2003 we issued and sold in concurrent private offerings (i) $273 million amount
payable at maturity of Convertible Debentures due March 14, 2023, representing $249 million in
gross proceeds to us, and (ii) $227 million aggregate principal
amount of 3 1/2% Subordinated
Convertible Debentures due March 14, 2052. The total combined gross proceeds from these two issues
of convertible debt securities were $476 million. Together with available cash, the net cash
proceeds of $470 million received from the concurrent private offerings, after commissions and
other expenses, were used to redeem, as discussed below, (i) our Preferred Shares Series E and (ii)
our 5 3/4% Convertible Debentures due 2004. On March 28, 2003, we announced that we would exercise our optional right to redeem all of our
issued and outstanding Preferred Shares Series E having a $472 million aggregate liquidation
preference and which were subject to mandatory redemption in 2006, with this redemption to be
effective May 1, 2003. We also announced the redemption of all of our outstanding $173 million
aggregate principal amount of 5 3/4% Convertible Debentures due 2004. These redemptions were
completed on May 1, 2003. The total aggregate redemption price for our Preferred Shares Series E
was $487 million, including a total redemption premium of $15 million based upon the $50 issue
price per Preferred Share Series E. The total aggregate
redemption price for our 5 3/4% Convertible
Debentures due 2004 was $178 million, including $3 million in accrued interest and a loss on
redemption of $2 million. On September 26, 2003, we announced that we would exercise our optional right to redeem on
October 27, 2003 all of our currently outstanding 7 3/4% Convertible Debentures due 2016 at a
redemption price of 100% of the aggregate outstanding principal amount plus accrued interest to the
October 27, 2003 redemption date. Interest ceased to accrue on
the 7 3/4% Convertible Debentures due
2016 on and after that redemption date. The conversion price for each
7 3/4% Convertible Debenture
due 2016 was $38.25 per Common Share. On September 26, 2003, we announced that we would also exercise our optional right to redeem
on October 27, 2003 all of our currently outstanding 9.60% Debentures due 2022 at a redemption
price of 104.32 per cent of the aggregate outstanding principal amount (or $1,043.20 per $1,000 in
principal amount) plus accrued interest to the October 27, 2003 redemption date. Interest ceased
to accrue on the 9.60% Debentures due 2022 on and after that redemption date. 101




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Preferred dividends totalling $6 million were paid in 2003 compared with $26 million in 2002
on the Preferred Shares Series E in accordance with the terms of those shares. Dividends paid to
minority interest shareholders were $7 million and $1 million in 2003 and 2002, respectively. This
increase in 2003 relates to the increased dividends paid by PT Inco. 
 Off-Balance Sheet Arrangements and Aggregate Contractual Obligations 
 Contractual Obligations This section summarizes as of December 31, 2004 certain of our contractual obligations
and our off-balance sheet arrangements. The first table below highlights our contractual
obligations. Certain of these contractual obligations, including long-term debt obligations and
asset retirement obligations, are also reflected in our December 31, 2004 balance sheet (reference
is made to notes 11 and 13 to our 2004 consolidated financial statements), while the other
obligations are off-balance sheet ones. In addition to these contractual obligations, we also have
certain contingencies and guarantees, as discussed below. The majority of our derivative positions
as at December 31, 2004 fall into the category of off-balance sheet arrangements and, consistent
with Canadian GAAP, are designated as effective hedging relationships. Our outstanding derivative
positions as at December 31, 2004 and December 31, 2003 are summarized in the tables under
Derivative Instrument Positions below. ($ millions)
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    After 5 yearsLong-term debt obligations
    
    $
    1,658
    
    
    $
    107
    
    
    $
    126
    
    
    $
    74
    
    
    $
    1,351Operating lease obligations
    
    
    86
    
    
    
    35
    
    
    
    41
    
    
    
    8
    
    
    
    2Purchase obligations1
    
    
    460
    
    
    
    373
    
    
    
    58
    
    
    
    10
    
    
    
    19Post-retirement benefit
obligations2
    
    
    160
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    Asset retirement obligations
    
    
    1,050
    
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    1,040Other long-term liabilities and
contractual obligations
    
    
    98
    
    
    
    2
    
    
    
    5
    
    
    
    6
    
    
    
    85Total
    
    $
    3,512
    
    
    $
    679
    
    
    $
    233
    
    
    $
    103
    
    
    $
    2,497
   1
    
    These purchase obligations are largely related to the Voiseys Bay and
Goro projects, with the balance comprising routine orders to purchase goods and services at
our current operating locations.2
    
    Includes voluntary contributions. With respect to any mandatory redemption requirements covering our outstanding debt
securities over the 2005  2009 period, reference is made to (i) note 15 to our 2004 consolidated
financial statements for information on the special contingent conversion right that holders of
certain of our convertible debt have and (ii) note 11 to our 2004 consolidated financial statements
for information on the redemption provisions of certain long-term debt. These purchase obligations set forth in the table above include our commitments for the Goro
and Voiseys Bay projects, as noted under Outlook below, as of December 31, 2004. Except for
these commitments, this table does not include our expected capital expenditures over the next five
years and thereafter since such expenditures do not represent contractual obligations. We
currently estimate that our existing operations require, on an annual basis, on average
approximately $250 million of capital expenditures to sustain their operations and to meet current
environmental regulations and similar requirements at our currently planned production and/or
utilization levels for these operations. Amounts included in Post-retirement benefit obligations in the table above represent the
contractual funding requirements for our pension plans in 2005. The required funding amounts for
our pension plans are actuarially determined and are subject to future uncertainties, including the
expected or assumed rate of return on plan assets and the discount rate on pension obligations we
use will be higher or lower over time (each of which may change over time). We have only included
these obligations in the table for one year since such obligations are calculated on an annual
basis. The amounts included in Asset retirement obligations in the table above represent our
present legal obligations for closure and related costs at all our existing operating mines and
non-operating mines and properties based upon the closure plans which we have developed in
accordance with regulatory or our own internal requirements applicable to those mines and
properties. Reference is made to note 13 to our 2004 consolidated financial statements. 102




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##### Table of Contents



Contingencies and Guarantees In the course of our operations, we are subject to routine claims and litigation
incidental to our business, to various environmental proceedings, and to other litigation related
to such business. With respect to the environmental proceedings currently pending or threatened
against us, they include (1) a proceeding brought under the Ontario class action legislation
covering claims relating to the alleged decline in property values in a community where we had
operated a nickel refinery over the 1918  1984 period, (2) claims for personal injury, (3)
enforcement actions, (4) alleged violations of, including exceeding regulatory limits relating to
discharges under, certain environmental or similar laws and regulations applicable to our
operations in Canada and elsewhere and (5) certain claims dating back a number of years in which
one of our subsidiaries was designated, under the United States federal environmental law known as
Superfund or CERCLA, as a potentially responsible party. We currently believe that the
ultimate resolution of such proceedings, claims and litigation will not significantly impair our
operations or have a material adverse effect on our financial position or results of operation. In connection with our 1996 acquisition of Diamond Fields Resources Inc., we assumed an
obligation to pay to a company retained by Diamond Field Resources Inc. to provide certain
exploration and other services an annual royalty in the form of a net smelter return amounting to
three per cent of the net proceeds received from the sale of ores, metals and other minerals
produced from our Voiseys Bay project, after deducting certain costs associated with the
production and sale of the ores, metals and minerals produced. While no such royalty payments have
been made to date since the Voiseys Bay project is not yet in production, it is expected that
these royalties will be payable once production from Vosieys Bay reaches certain threshold levels
currently expected to be met in 2006. In addition, as discussed in notes 14 and 22(b) of the 2004 consolidated financial statements,
in connection with a French government-sponsored financing program for which our Goro project
qualified (the Girardin Financing), we provided certain guarantees on behalf of Goro Nickel S.A.
covering payments due from Goro Nickel S.A. of up to a maximum amount of $100 million (Maximum
Amount) in connection with an indemnity relating to certain potential liabilities associated with
the loss or forfeiture by qualified French tax investors who participated in this program of
certain tax benefits associated with the Girardin Financing (Add-Back Indemnity). We also
provided an additional guarantee covering the payments due from Goro Nickel S.A. of (a) amounts
exceeding the Maximum Amount in connection with the Add-Back Indemnity and (b) certain other
amounts payable by Goro Nickel S.A. under the Girardin Financing relating to certain possible
operational or other developments applicable to the Goro project. We also provided a guarantee covering certain termination payments due from Goro Nickel S.A.
to the supplier under an electricity supply agreement (ESA) entered into in October 2004 for the
Goro project. The amount of the termination payments guaranteed depends upon a number of factors,
including whether any termination of the ESA is as a result of a default by Goro Nickel S.A. and
the date on which an early termination of the ESA were to occur. If Goro Nickel S.A. defaults
under the ESA, the termination payment could reach up to an amount of Euros 145 million. This
maximum amount could be payable if termination of the ESA occurred prior to the anticipated start
date for supply of electricity under the ESA to the project. Once the supply of electricity to the
project begins, the guaranteed amounts will decrease over the life of the ESA. 
 Derivative Instrument Positions As discussed in Risks and Uncertainties  Market Risk  Metals and Commodities Risk 
Foreign Exchange Risk  and Interest Rate Risk below, we engage in derivative instrument
transactions to reduce the impact, to varying degrees, of certain market risks to which we are
exposed on our earnings and cash flows from operations. Reference is made to these sections under
Risks and Uncertainties below for further information on these transactions, as well as to note
21 to the 2004 consolidated financial statements. The following table shows the notional amounts of our principal derivative instrument
positions as at December 31, 2004: As at December 31, 2004
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    TotalMetalsLME Forward Nickel Purchase Contracts1 (tonnes)
    
    
    5,274
    
    
    
    804
    
    
    
    348
    
    
    
    
    
    
    
    6,426Average price ($  per tonne)
    
    
    12,283
    
    
    
    9,748
    
    
    
    9,667
    
    
    
    
    
    
    
    11,824Contract amount (in $ millions)
    
    
    65
    
    
    
    8
    
    
    
    3
    
    
    
    
    
    
    
    76Fair value (in $ millions)
    
    
    13
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    17
 103




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As at December 31, 2004
    
    2005
    
    
    2006
    

    
    2007
    
    
    2008
    
    
    TotalLME Forward Nickel Sell Contracts2(tonnes)
    
    
    1,464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,464Average price ($  per tonne)
    
    
    14,543
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,543Contract amount (in $ millions)
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Fair value (in $ millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Palladium Fixed Price Swaps (troy ounces)
    
    
    9,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,390Average price ($  per troy ounce)
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295Contract amount (in $ millions)
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Fair value (in $ millions)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Platinum Fixed Price Swaps (troy ounces)
    
    
    30,828
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    42,828Average price ($  per troy ounce)
    
    
    647
    
    
    
    651
    
    
    
    
    
    
    
    
    
    
    
    648Contract amount (in $ millions)
    
    
    20
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    28Fair value (in $ millions)
    
    
    (7
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )Gold Fixed Price Swaps (troy ounces)
    
    
    29,956
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,956Average price ($  per troy ounce)
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390Contract amount (in $ millions)
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Fair value (in $ millions)
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Platinum range forward options (troy ounces)
    
    
    35,173
    
    
    
    20,009
    
    
    
    24,174
    
    
    
    34,644
    
    
    
    114,000Average (minimum-maximum) ($  per troy ounce)
    
    
    698-829
    
    
    
    688-802
    
    
    
    720-823
    
    
    
    700-808
    
    
    
    701-816Contract amount (in $ millions)
    
    
    25-29
    
    
    
    14-16
    
    
    
    17-20
    
    
    
    24-28
    
    
    
    80-93Fair value (in $ millions)
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (8
    )Fuel Oil Swaps (tonnes)
    
    
    83,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,650Average Price ($  per tonne)
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Contract amount (in $ millions)
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Fair value (in $ millions)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2CurrenciesCdn.$ forward contracts (millions)
    
    
    458
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    479Average price (U.S.$)
    
    
    0.782
    
    
    
    0.845
    
    
    
    
    
    
    
    
    
    
    
    0.785Contract amount (in $ millions)
    
    
    358
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    376Fair value (in $ millions)
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Aus.$ (millions)
    
    
    100
    
    
    
    155
    
    
    
    45
    
    
    
    
    
    
    
    300Average price (U.S.$)
    
    
    0.675
    
    
    
    0.668
    
    
    
    0.712
    
    
    
    
    
    
    
    0.677Contract amount (in $ millions)
    
    
    67
    
    
    
    104
    
    
    
    32
    
    
    
    
    
    
    
    203Fair value (in $ millions)
    
    
    9
    
    
    
    14
    
    
    
    2
    
    
    
    
    
    
    
    25Pounds sterling (millions)
    
    
    6
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    14Average price (U.S.$)
    
    
    1.749
    
    
    
    1.743
    
    
    
    
    
    
    
    
    
    
    
    1.746Contract amount (in $ millions)
    
    
    10
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    24Fair value (in $ millions)
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2Interest Rate Swaps (notional principal amount in $ millions)(maturity 2011)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200(maturity 2012)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400(maturity 2015)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Fair value (in $ millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
   1
    
    LME nickel purchase contracts were substantially offset by fixed price
customer contracts with identical terms to more fully expose us to nickel price risk .2
    
    LME nickel sell contracts were entered into to minimize the nickel price risk
associated with purchased nickel inventories. With respect to metals derivative instruments in 2004, we entered into nickel forward
purchase contracts to match fixed price customer contracts for the 2005-2007 period and we entered
into nickel forward sell contracts for 2005 to minimize the nickel price risk associated with
purchased nickel inventories. In 2004, we increased our outstanding positions in the derivatives
used to hedge a portion of our planned production of platinum. No new positions were entered into
for gold or palladium in 2004. With respect to currencies, we entered into forward purchase
contracts for Canadian dollars in 2005 and 2006 to cover a portion of the estimated Canadian dollar
capital expenditure requirements for the Voiseys Bay project and certain other capital
expenditures for our Canadian operations. We also entered into additional Australian dollar and
Pound sterling forward currency contracts for the period 2005-2007 104




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##### Table of Contents



to cover a portion of these
currency capital expenditure requirements for the Goro project. We entered into a new swap
arrangement in 2004 to manage the interest rate risk associated with $200 million drawn under our
new $400 million term loan facility discussed above. At March 11, 2005, we had outstanding put option contracts, giving us the right but not the
obligation, to sell 15,000 tonnes of copper at an average price of $2,425 per tonne in 2006. At
March 11, 2005, we also had outstanding put option contracts, giving us the right but not the
obligation to sell 35,400 tonnes of copper at an average price of $2,205 per tonne in 2007 and sold
call option
contracts, giving the buyer the right but not the obligation to purchase 35,400 tonnes of
copper at an average price of $3,000 per tonne during the same time period. The following table shows the notional amounts of our principal derivative instrument
positions as at December 31, 2003: As at December 31, 2003
    
    2004
    
    
    2005
    
    
    2006
    
    
    TotalMetalsLME Forward Nickel Purchase Contracts1 (tonnes)
    
    
    8,058
    
    
    
    768
    
    
    
    222
    
    
    
    9,048Average price ($  per tonne)
    
    
    12,706
    
    
    
    8,442
    
    
    
    8,850
    
    
    
    12,250Contract amount (in $ millions)
    
    
    102
    
    
    
    7
    
    
    
    2
    
    
    
    111Fair value (in $ millions)
    
    
    28
    
    
    
    4
    
    
    
    1
    
    
    
    33LME Forward Nickel Sell Contracts2(tonnes)
    
    
    4,104
    
    
    
    
    
    
    
    
    
    
    
    4,104Average price ($  per tonne)
    
    
    15,858
    
    
    
    
    
    
    
    
    
    
    
    15,858Contract amount (in $ millions)
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Fair value (in $ millions)
    
    
    (3
    )
    
    
    
    
    
    
    
    
    

    
    (3
    )Palladium Fixed Price Swaps (troy ounces)
    
    
    
    
    
    
    9,390
    
    
    
    
    
    
    
    9,390Average price ($  per troy ounce)
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    295Contract amount (in $ millions)
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Fair value (in $ millions)
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Platinum Fixed Price Swaps (troy ounces)
    
    
    39,600
    
    
    
    30,828
    
    
    
    12,000
    
    
    
    82,428Average price ($  per troy ounce)
    
    
    634
    
    
    
    647
    
    
    
    651
    
    
    
    641Contract amount (in $ millions)
    
    
    25
    
    
    
    20
    
    
    
    8
    
    
    
    53Fair value (in $ millions)
    
    
    (6
    )
    
    
    (4
    )
    
    
    (1
    )
    
    
    (11
    )Gold Fixed Price Swaps (troy ounces)
    
    
    30,648
    
    
    
    29,956
    
    
    
    
    
    
    
    60,604Average price ($  per troy ounce)
    
    
    387
    
    
    
    390
    
    
    
    
    
    
    
    388Contract amount (in $ millions)
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    24Fair value (in $ millions)
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )Platinum range forward options (troy ounces)
    
    
    30,774
    
    
    
    19,540
    
    
    
    10,003
    
    
    
    60,317Average (minimum-maximum) ($  per troy ounce)
    
    
    618-753
    
    
    
    678-812
    
    
    
    651-785
    
    
    
    643-777Contract amount (in $ millions)
    
    
    19-23
    
    
    
    13-16
    
    
    
    7-8
    
    
    
    39-47Fair value (in $ millions)
    
    
    (2
    )
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Gold range forward options (troy ounces)
    
    
    15,324
    
    
    
    
    
    
    
    
    
    
    
    15,324Average (minimum-maximum) ($  per troy ounce)
    
    
    345-415
    
    
    
    
    
    
    
    
    
    
    
    345-415Contract amount (in $ millions)
    
    
    5-6
    
    
    
    
    
    
    
    
    
    
    
    5-6Fair value (in $ millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fuel Oil Swaps (tonnes)
    
    
    80,000
    
    
    
    40,000
    
    
    
    
    
    
    
    120,000Average Price ($  per tonne)
    
    
    132
    
    
    
    136
    
    
    
    
    
    
    
    134Contract amount (in $ millions)
    
    
    11
    
    
    
    5
    
    
    
    
    
    
    
    16Fair value (in $ millions)
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    4
 105




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##### Table of Contents



As at December 31, 2003
    
    2004
    
    
    2005
    
    
    2006
    
    
    TotalCurrenciesCdn.$ forward contracts (millions)
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    85Average price (U.S.$)
    
    
    0.717
    
    
    
    
    
    
    
    
    
    
    
    0.717Contract amount (in $ millions)
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    61Fair value (in $ millions)
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Aus.$ (millions)
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Average price (U.S.$)
    
    
    0.525
    
    
    
    
    
    
    
    
    
    
    
    0.525Contract amount (in $ millions)
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Fair value (in $ millions)
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Euro (millions)
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Average price (U.S.$)
    
    
    0.873
    
    
    
    
    
    
    
    
    
    
    
    0.873Contract amount (in $ millions)
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Fair value (in $ millions)
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21Interest Rate Swaps (notional principal amount in $ millions)(maturity 2012)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400(maturity 2015)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Fair value (in $ millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
   1
    
    LME nickel purchase contracts were substantially offset by fixed price
customer contracts with identical terms to more fully expose us to nickel price risk .2
    
    LME nickel sell contracts were entered into to minimize the nickel price risk
associated with purchased nickel inventories. With respect to metals derivative instruments, in 2003 we increased our outstanding
position in the derivatives used to hedge a portion of our planned production of platinum and we
entered into hedges for a portion of our future production of gold. No new positions were added
for hedging of our palladium production. With respect to derivative instruments for currencies, we
entered into Canadian dollar forward contracts to hedge a portion of the Canadian
dollar-denominated capital costs for the initial phase of Voiseys Bay. No new positions were
engaged for the Euro and Australian dollars in respect of the Goro project because of the
suspension of this project in late 2002 as discussed above. In 2003, our interest rate swap in
respect of our 9.60% Debentures due 2022 was cancelled and this debt was redeemed. We entered into
new swap arrangements in 2003 to manage the entire amount of the interest rate risk associated with
our 5.70% Debentures due 2015 and our 7.75% Notes due 2012. 
 Other Off-Balance Sheet Arrangements During 2003, we had discussions with representatives of the Province of Manitoba
regarding what amount of financial assurance covering future closure or similar requirements might
be required for our Manitoba operations under then recently enacted provincial regulations. Based
upon those discussions, financial assurance in the form of a letter of credit of approximately $0.4
million covering certain long-term costs of maintaining certain of the Manitoba operations was
provided by us. The Province of Manitoba established certain guidelines relating to what, if any,
further financial assurance might be required for these operations. While we currently cannot
predict what, if any, additional amount of financial assurance will be required by this province,
we do not believe that it will have a material effect on our results of operations, financial
condition or liquidity. As discussed under Risks and Uncertainties  Environmental Risks below, as of December 31,
2004 we had outstanding letters of credit in the amount of $23 million to secure a portion of our
closure costs covering three mines in our Ontario operations. We have also provided a letter of
credit in the amount of approximately $7 million covering certain remediation costs if we abandoned
the construction of certain infrastructure at Voiseys Bay. The off-balance sheet arrangements we currently have in place involve accounts receivable
securitized financing arrangements in the United States and Japan with unrelated entities under
which up to approximately $142 million in eligible receivables may be sold by us to these entities
at any time. Under these accounts receivable financing arrangements, a significant deterioration
in our credit rating and/or accounts receivable being sold could give the purchaser of such
receivables the right not to renew the arrangements. We have accounted for these securitizations
as asset sales since their inception but have recorded where relevant any loss retention reserves
with respect to the sale. As at December 31, 2004, the aggregate amount of receivables sold was
$45 million. We do not currently believe that our liquidity would be substantially reduced if
these arrangements were not available to us. There are no significant long-term contractual arrangements with any related parties that
create or result in any obligations that are not on an arms length, negotiated basis. 106




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Risks and Uncertainties The following risks and uncertainties, among others, should be considered in evaluating
our outlook and future prospects. 
 Market Risk We define market risk as being the risk of potential economic loss arising from adverse
changes in market rates and prices. Given the nature of our business and operations, the areas of
highest market risk or exposure for us are nickel prices and, to a lesser extent, our prices of
other metals and commodities that we produce or purchase (representing what we refer to as our
metals and commodities risk), foreign currency exchange rates (representing what we refer to as our
foreign exchange risk) and interest rates (representing what we refer to as our interest rate
risk), all of which are as discussed below. In the case of our metals and commodities risk, we
sell our products at prices based on world market prices and purchase fuel oil and other supplies
at market prices since these supplies are essentially commodities which can be purchased from a
large number of available sources. In addition to the two Australian suppliers of intermediate
products to our Canadian operations referred to below, we have a limited number of sole source
suppliers of critical materials or services, including electricity in Canada and other locations.
While the prices for our primary nickel and other metals produced are based largely on, and sold
in, U.S. dollars, we are subject to foreign exchange risk because we incur a substantial portion of
our costs and expenses in currencies other than the U.S. dollar, in particular the Canadian dollar.
We are exposed to additional foreign exchange risk and are also exposed to interest rate risk
because, to the extent that we fund our operations and capital expenditures primarily through
long-term and short-term borrowings, these borrowings are primarily in U.S. dollars. Based upon
past
movements of certain foreign currency exchange rates, as described below, and our current
expectations of continued volatility in such exchange rates for 2005, we believe that the potential
near-term impact on future earnings and cash flows with respect to a change in foreign currency
exchange rates could have a material impact on our financial condition, results of operations and
cash flows. Based upon recent past movements in interest rates, as described below, and our
current expectations of changes in interest rates in 2005, we currently believe that the potential
near-term impact of such changes on future earnings will not have a material impact on our
financial condition or results of operations. The metals and commodity risks relating to nickel
and, to a lesser extent, other metals produced by us, given the significance of price realizations
to us of such metals, are expected to continue to have a material impact on our results of
operations, cash flows and financial condition. With the increase in nickel prices and price volatility experienced in 2004, the nickel
industry has seen some substitution of other less costly metals or materials for nickel in certain
applications. Any significant increases in such substitution, particularly if such changes
represented a permanent shift away from the use of nickel, would be expected to adversely affect
nickel demand and our results of operations, financial condition and cash flow from operations. An uncertain global economic environment would be expected to have a significant adverse
effect on our business, results of operations, financial condition and cash flows given, as
indicated above, the historical correlation between industrial production and demand for primary
nickel and the other products we produce. There can be no assurance that oversupply situations
that existed in the past in the nickel markets could not reoccur in the future. Any excess supply
condition would have an adverse effect on the prices realized by us for our nickel products. Other
international economic trends, expectations of inflation and political events in major nickel
producing and consuming countries could also adversely affect nickel prices and the prices of other
metals produced by us. These factors are beyond our control and have resulted, and are expected to
continue to result, in a high degree of price volatility for nickel and other primary metals
produced by us. There can be no assurance that the price for nickel or other metals produced by us will not
decline significantly from current levels. A return to nickel price realizations for us reasonably
near to the relatively low price of nickel reflected by the LME cash nickel price which prevailed
throughout most of 1998 and into the first half of 1999 when the LME cash nickel price reached a
low of $3,725 per tonne ($1.69 per pound) in December 1998, as a result of the decrease in nickel
demand experienced in 1998 and the expected increase in nickel supply to be brought into the market
from three new Australian laterite nickel projects that had been developed, and during a portion of
the second half of 2001 when the LME cash nickel price was as low as $4,420 per tonne ($2.00 per
pound) in October 2001, would have a material adverse effect on our results of operations,
financial condition and cash flows. If demand for nickel in Asia, or any other major consuming region, were to decline
significantly, such an event would be expected to negatively affect nickel prices and our results
of operations, financial condition and our cash flow from operations. If and to the extent that,
given the positive correlation that has existed historically between demand for nickel and
industrial production, other industrialized regions of the world were to experience slower economic
growth or an actual decline in economic growth, such a development would also be expected to affect
nickel prices and our results of operations, financial condition, and cash flow from operations.
We have experienced periods of low nickel prices due to over-supply conditions and/or declines in
nickel demand and, 107




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given the historically cyclical nature of nickel supply and demand, we expect
that similar periods could reoccur in the future which could result in our experiencing
unfavourable results of operations, including net losses and negative cash flows. We have engaged in transactions to reduce, to varying degrees, the impact of certain of these
market risks to which we are exposed on our earnings and cash flow from operations. We have
established policies and procedures governing the use of derivative instruments to address certain
market risks. These policies and procedures are intended to reduce some of the uncertainties
associated with the market risks specific to our business and operations and reduce the effect of
market fluctuations relating to the metals we produce and supplies of products and services we need
for our operations on our earnings and cash flows. We only use derivative instruments based on an
economic analysis of the underlying exposures, factoring in the anticipated correlations of the
underlying exposures, anticipating that adverse effects on future earnings and cash flows due to
fluctuations in metals and commodities prices, foreign currency exchange rates and interest rates
will be offset by proceeds from, and changes in the fair value of, the derivative instruments. We
do not, however, hedge our exposure to all market risks and do not hedge our exposure to any market
risk in a manner that completely eliminates the effects of changing market conditions on earnings
or cash flows. We have had in place an internal risk management committee for a number of years. This
committee is comprised of senior financial and marketing executives and chaired by our Chief
Executive Officer. This internal committee oversees our hedging activities, whereby we use
derivative instruments to reduce market risks. The risk management committees oversight includes
reviewing compliance with our risk management policies authorized by our Board of Directors. The
risk management policies set
forth the responsibilities of the internal risk management committee, its membership and
conduct, reporting requirements, controls, maximum hedging limits and related authorizations
delegated by our Board of Directors. Under our risk management policies, hedging activities are restricted by maximum limits which
are specifically approved by our Board of Directors. The maximum limits are usually tied to a
maximum percentage of forecast annual production volume (or annual requirements, in the case of
supplies or currencies, as the case may be) for current and future years, up to five years.
Maximum limits are, subject to changes in, or stand-alone authorizations which Incos Board of
Directors may approve from time to time, currently as follows: for nickel (year 1: 35 per cent of
forecast annual production, year 2: 25 per cent, year 3: 10 per cent); copper, platinum, palladium
and gold (years 1 and 2: 75 per cent of forecast annual production, years 3 to 5: 50 per cent);
certain supplies to our operations (such as oil, natural gas and electricity) (year 1: 75 per cent
of forecast annual requirements, year 2: 50 per cent, years 3 to 5: 25 per cent); and foreign
currency (year 1: 75 per cent of forecast annual requirements, years 2 and 3: 50 per cent, years 4
and 5: 20 per cent). To the extent that we do hedge for certain metals other than nickel and for
supplies and foreign currencies, we have historically hedged at levels below these limitations
absent specific circumstances where we believe that hedging up to or close to such limits would be
appropriate. In the case of metals, other than nickel, produced by us, we have from time to time
entered into derivative instruments to fix minimum realized prices and, in the case of nickel, as
discussed below, we have entered into formal sales or purchase contracts to hedge certain sales to
our customers or purchases by us from suppliers of intermediate products. In addition, pursuant to our annual financing plan approved each year by our Board of
Directors, as well as specific debt financings authorized by our Board of Directors from time to
time, interest rate swaps may be authorized to effectively convert the interest rate applicable to
all or part of a debt financing from a fixed to a floating rate or vice versa at rates covered by
such approvals or authorizations, including interest rate swaps entered into on a short-term basis
in anticipation of the completion of a specific financing. In addition to a quarterly review by our internal risk management committee of all hedging
activities and hedge positions, for each quarter all hedging activities and hedge positions are
reviewed with and reported to our Audit Committee. Our internal audit group is also responsible
for examining internal controls, trade execution and monitoring, reporting and compliance with the
risk management policy annually. 
 Metals and Commodities Risk We are subject to metals and commodities risk because we sell our products and purchase
fuel oil and other supplies or services at prices for the most part effectively determined through
trading on major commodity exchanges, in particular the LME and the New York Mercantile Exchange.
The prices offered on these exchanges generally reflect the global balance of supply and demand for
the particular metal or commodity but are also influenced in the short-term by such factors as
investment funds flow, speculative activity in the particular commodity and currency exchange
rates. The price of nickel, our principal product, continues to represent the major factor
influencing our results of operations, financial condition and cash flow from operations. The
selling prices for our primary nickel products are generally based on the LME cash 108




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nickel price.
However, certain of our products are customarily sold at a premium over the LME cash price,
particularly special products such as nickel powders and foams. The markets for our products have
been, and are expected to continue to be, cyclical in nature and prices have been, and are expected
to continue to be, volatile. However, because we are one of the largest producers and marketers of
primary nickel in the world, we have chosen, subject to certain limited exceptions as discussed
below, not to hedge or otherwise attempt to mitigate to any significant degree the risk of
fluctuations in the price of nickel. We review this policy from time to time and may choose to
increase the currently limited use of derivative instruments to reduce such risks in the future.
In the case of other metals produced by us, we have from time to time entered into derivative
instruments to fix minimum realized prices. We do enter into LME forward purchase contracts which
are substantially offset by fixed price customer contracts in order to more fully expose us to
nickel price risk. We also enter into LME forward sales contracts to minimize nickel price risk
associated with purchased nickel inventories of intermediates and finished nickel products. In
respect of these types of hedges, at December 31, 2004 we had outstanding LME forward contracts to
purchase 6,426 tonnes of nickel during the 2005 to 2007 period at an average price of $11,824 per
tonne ($5.36 per pound) and LME forward contracts to sell 1,464 tonnes of nickel during 2005 at an
average price of $14,543 per tonne ($6.60 per pound). Depending on market conditions, we enter into precious metals hedging contracts with various
financial counterparties. These contracts, in the form of swap contracts (whereby we
simultaneously sell at a fixed price and buy the same quantities for the same maturity dates at a
floating price), are intended to provide certain minimum price realizations in respect of a portion
of our future production of such metals. At December 31, 2004, we had outstanding swap contracts
to exchange payments on 9,390 troy ounces of
palladium during 2005. Under the swap contracts, we receive a fixed price of $295 per troy
ounce and pay a floating price based on monthly average spot prices. At December 31, 2004, we had
outstanding swap contracts to exchange payments on 42,828 troy ounces of platinum in the aggregate
during 2005 and 2006. Under these swap contracts, we receive fixed prices for platinum at an
average price of $648 per troy ounce and pay a floating price based on monthly average spot prices.
At December 31, 2004, we had outstanding swap contracts to exchange payments on 29,956 troy ounces
of gold in the aggregate during 2005. Under these swap contracts, we receive fixed prices at an
average price of $390 per troy ounce and pay a floating price based on monthly average spot prices. At December 31, 2004, we had outstanding put option contracts, giving us the right but not the
obligation to sell 114,000 troy ounces of platinum at an average price of $701 per troy ounce at
various dates over the 2005 to 2008 period, and sold call option contracts, giving the buyer the
right but not the obligation, to purchase 114,000 troy ounces of platinum at an average price of
$816 per troy ounce during the same time period. We use fuel oil swap contracts to reduce the effect of fuel oil price changes in respect of a
portion of our energy requirements at PT Inco. Under these contracts, we receive or make payments
based on the difference between a fixed and a floating price for fuel oil. At December 31, 2004,
we had entered into swap contracts with financial institutions to exchange payments on 83,650
tonnes of fuel oil in aggregate during 2005. Under the swap contracts, we pay fixed prices
averaging $165 per tonne for fuel oil and receive a floating price based on monthly average spot
price quotations. Reference is made to Derivative Instrument Positions under Off-Balance Sheet Arrangements
and Aggregate Contractual Obligations above and note 21 to our 2004 consolidated financial
statements for information concerning our derivative instruments, including how the fair value of
such instruments has been determined. Once our development projects begin commercial production, we will become a significant
producer of cobalt. When that occurs, we could be affected by the highly competitive market for
cobalt that currently exists and is expected to continue to exist. Cobalt sold to customers is
currently sold either on a fixed price basis using annual contracts for customers in certain
industries or on the basis of prices as quoted in the Metals Bulletin and Platts, which are
recognized metals industry publications that publish cobalt and other metal prices. Such published
prices are generally accepted as representing the benchmark or market price indicator for cobalt.
Cobalt, like nickel and copper, has historically been subject to significant price volatility and
we currently expect that such volatility will continue. The financial analyses undertaken by us
during 2004 in support of the substantial investment to be made with respect to our Goro
development project has been based upon a long term price of cobalt of $19.85 per kilogram ($9.00
per pound). If realized cobalt prices, as well as realized prices for the other metals to be
produced by our Voiseys Bay and/or Goro projects, were to be below the long-term prices assumed by
us, the expected financial returns from, and expected cash and other costs for, these projects
would be adversely affected. At December 31, 2004, none of our currently planned nickel or copper production is covered by,
or subject to, derivative contracts. At December 31, 2004, we had entered into derivative
contracts to hedge a portion of our planned precious metals production over varying periods up to
four years. Outstanding derivative contracts for platinum cover 41 per cent, 21 per cent, 15 per 109




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cent and 21 per cent of planned platinum production in 2005, 2006, 2007 and 2008, respectively; for
palladium the derivative contracts cover five per cent of planned palladium production in 2005 and
for gold the derivative contracts cover 46 per cent of planned gold production in 2005. We
currently expect to produce precious metals from our estimated proven and probable ore/mineral
reserves at our Ontario operations for a period in excess of twenty years, a period that extends
well beyond the maturity of our current derivative contracts covering precious metals. We have in
early 2005 entered into certain derivative contracts relating to our planned copper production.
Reference is made to Derivative Instruments under Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations above. 
 Foreign Exchange Risk By virtue of our international operations, we incur costs and expenses in a number of
foreign currencies other than the U.S. dollar. The exchange rates covering such currencies have
varied substantially in the last three years. A substantial portion of our revenue is received in
U.S. dollars since the price of nickel and other metals we produce are generally referenced in U.S.
dollars, while a significant portion of our costs and expenses are incurred in Canadian dollars.
Fluctuations in exchange rates between the U.S. dollar and the Canadian dollar and between the U.S.
dollar and certain other currencies give rise to foreign currency exposure, either favourable or
unfavourable, which have materially affected and are expected to continue to affect our results of
operations and financial condition. Our primary foreign exchange risk is to changes in the value of the Canadian dollar relative
to the U.S. dollar. We reduce, from time to time, the impact of this risk by entering into forward
currency contracts and foreign currency options. However, these activities do not eliminate the
potentially significant adverse effect that exchange rate fluctuations could have on our results of
operations or financial condition. At the end of 2004, these contracts took the form of forward
contracts, which establish a fixed exchange rate for the future purchases of the Canadian dollar
and certain other currencies, principally the Australian dollar and Pound sterling. The purpose of
these forward currency contracts is to eliminate the risk of foreign exchange movements on (i) a
portion of future Canadian dollar capital expenditures relating to our capital projects in Canada,
primarily the Voiseys Bay project and (ii) a portion of the future Australian dollar and Pound
sterling denominated construction costs for the planned production facilities for the Goro project. We are, to a substantially lesser extent, also subject to fluctuations in the value of the
Indonesian rupiah relative to the U.S. dollar as a result of our operations in Indonesia. This
impact is reduced by the fact that a significant portion of PT Incos costs and revenues are
effectively denominated in U.S. dollars. Because of the limited nature of this exposure, we do not
customarily hedge the value of the rupiah against the U.S. dollar and no such financial instruments
were in effect at December 31, 2004. At December 31, 2004, we had outstanding forward currency contracts to purchase Aus.$300
million at average exchange rates of $0.675, $0.668 and $0.712, respectively, during 2005, 2006 and
2007. We also had outstanding forward currency contracts to purchase Pound sterling 14 million at
average exchange rates of $1.749 and $1.743, respectively, during 2005 and 2006. The purpose of
these contracts is to eliminate the risk of exchange rate movements on a portion of the future
construction costs for the planned production facilities for the Goro project. Total gains in the
amount of $10 million were recorded in 2004 as Other Income relating to contracts that were either
ineffective or for which we did not apply hedge accounting. We also recorded a gain of $9 million
in Goro project suspension costs in respect of Euro denominated foreign currency contracts which
ceased to be effective as a result of the suspension of the Goro project. At December 31, 2004, we had outstanding forward currency contracts to purchase Cdn.$230
million at an average exchange rate of $0.749 during 2005. The purpose of these contracts is to
eliminate the risk of exchange rate movements on a portion of the future construction costs of the
planned facilities for the initial phase of the Voiseys Bay project. We also had outstanding at
December 31, 2004 forward currency contracts to purchase Cdn.$79 million at an average exchange
rate of $0.840 during 2005 and 2006. The purpose of these contracts is to eliminate the risk of
exchange rate movements on a portion of our future construction costs of a capital asset at our
Ontario operations. In addition, at December 31, 2004 we had outstanding forward currency
contracts to purchase Cdn.$170 million at an average exchange rate of $0.808 during 2005. The
purpose of these contracts is to offset the foreign exchange risk associated with a portion of our
Canadian dollar denominated tax liabilities which are due in the first quarter of 2005 in respect
of the 2004 calendar year. We have experienced periods where the U.S. dollar has been relatively strong in relation to
the Canadian dollar (for example, in 1999) and, more recently, when the U.S. dollar has been
relatively weak in relation to the Canadian dollar (for example, in 2003 and 2004). Historically,
the positive correlation between the Canadian dollar and metal prices has resulted in higher profit
margins for us during periods when the Canadian dollar has been relatively strong against the U.S.
dollar. Accordingly, while a stronger Canadian 110




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dollar has historically led to higher cash
operating costs for us in U.S. dollar terms, the historical accompanying increase in metal prices
has resulted in higher profit margins. Conversely, historically when the Canadian dollar has
weakened relative to the U.S. dollar we have experienced lower cash operating costs in U.S. dollar
terms and the historical accompanying decrease in metal prices has resulted in lower profit margins
for us. Due to this correlation and the historical responsiveness of nickel prices to cyclical
supply-demand factors, we do not currently anticipate that the impact of fluctuations in the
Canadian dollar over the relevant period for which we use the average exchange rates in estimating
our ore/mineral reserves will affect the quantities of our estimated proven and probable
ore/mineral reserves given the relative importance of factors, including the mineralization, other
than metals prices and exchange rates on the estimation of our ore/mineral reserves. However,
there can be no assurance that the historical correlation between the change in the value of the
Canadian dollar relative to the U.S. dollar and metal prices will continue and if it fails to do so
our estimates of proven and probable ore/mineral reserves could be adversely affected by a
significant strengthening of the Canadian dollar compared with the U.S. dollar. To the extent that
we would use other expected metal prices and exchange rates for our estimated proven and probable
ore/mineral reserves, these estimates could change significantly. While the U.S. dollar is the functional currency in our Canadian operations, we are required,
for income tax purposes, to report income subject to Canadian tax in Canadian dollars. We have a
number of long-term debt obligations denominated in currencies other than Canadian dollars.
Fluctuations in the value of the relevant foreign currencies in relation to the Canadian dollar can
give rise to capital and/or income gains or losses for Canadian income tax purposes on the
repayment of any such foreign currency-denominated long-term debt obligations. Since the U.S.
dollar is both our functional and reporting currency, no gains or losses on the settlement or
marking to market of U.S. dollar-based obligations (representing the primary dollar
denomination of our long-term debt obligations) is reported in computing income reported in our
2004 consolidated financial statements. For reporting purposes, we reflect the Canadian taxes
potentially payable on the settlement of our non-Canadian dollar-denominated debt in computing our
long-term deferred tax assets and liabilities for unrealized gains and losses and as a current tax
expense for realized gains and losses. No taxable event in respect of the debt occurs until the
debt is settled by payment or other form of discharge for Canadian tax purposes. Should a fluctuation in the value between the Canadian dollar and the relevant foreign
currencies result in us being subject to reporting a capital and/or income gain for Canadian income
tax purposes when a debt were repaid, we would report as either a current tax expense in respect of
realized gains, or a deferred tax expense in respect of unrealized gains, for the Canadian income
taxes payable, in respect of such a gain. This increase in our tax provision may distort our
effective tax rate, since no such foreign currency gain would be reported in our consolidated
financial statements. 
 Interest Rate Risk Our exposure to changes in interest rates results from investing and borrowing activities
undertaken to manage our liquidity and capital requirements. We generally have used fixed-rate
debt to finance long-term investments, while variable-rate debt has been used to meet working
capital requirements and related requirements on a more near-term basis. At December 31, 2004,
taking into account our interest rate swaps discussed below, approximately 51 per cent of our total
debt, or $846 million, was subject to variable interest rates. Based upon the level of floating or
variable-rate debt at December 31, 2004, the impact of a 10 per cent change in underlying interest
rates, or 26 basis points, would change interest expense by about $2 million over a full year. As
noted under Cash Flows, Liquidity and Capital Resources  2004 Compared with 2003 above, we could
be required to raise additional debt in the future to meet our capital expenditures and other
requirements, and we could experience higher interest costs as a result of a downgrade in our
credit ratings and, accordingly, in such cases our results of operations and cash flow from
operations could be materially adversely affected by changes in interest rates in the future
despite any interest rate swaps we might then have in effect. As at December 31, 2004, we had an outstanding interest rate swap of a notional principal
amount of $300 million in respect of our 5.70% Debentures due 2015, whereby we receive a fixed rate
of interest of 5.70 per cent and pay a floating rate equal to London interbank offered rates plus
0.57 per cent. We also had an interest rate swap of a notional principal amount of $400 million in
respect of our 7.75% Notes due 2012, whereby we receive a fixed rate of interest of 7.75 per cent
and pay a floating rate equal to London interbank offered rates plus 3.25 per cent. In 2004, we
entered into a new interest rate swap in respect of our $200 million term loan due 2011 whereby we
receive a floating rate of interest at certain London interbank offered rates plus 0.875 per cent
and pay a fixed rate of 5.098 per cent. 
 Counterparty Risk Our interest rate swaps, metals and foreign currency risk management activities expose us
to the risk of default by the counterparties to such arrangements. Any such default could have a
material adverse effect on our results of operations and financial condition. We do not obtain
collateral or other security to support derivative instruments subject to credit risk but mitigate
this risk by 111




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dealing only with counterparties that we believe, based upon an assessment of each
such counterpartys financial history and experience, to be financially sound and, accordingly, we
do not anticipate a loss for non-performance by any counterparty with whom we have a commercial
relationship. 
 Environmental Risk Environmental legislation and regulations affect nearly all aspects of our operations
worldwide. Such legislation and regulations apply to us along with other companies in the mining
and metals industry. These types of legislation and regulations require us to obtain operating
licences, permits and other approvals and impose standards and controls on activities relating to
mining, exploration, development, production, reclamation, closure and the refining, distribution
and marketing of nickel and other metal products. Environmental assessments are required before
initiating most new projects or undertaking significant changes to existing operations. In addition
to current requirements, we expect that additional environmental regulations will likely be
implemented to protect the environment and quality of life, given issues of sustainable development
and other similar requirements which governmental and supragovernmental organizations and other
bodies have been pursuing. Some of the issues currently under review by environmental regulatory
agencies include (i) further reductions in, or requiring enhanced stabilization of, various
emissions, including sulphur dioxide, metals and greenhouse gas emissions, (ii) additional mine
reclamation and restoration, and (iii) more restrictive water, air and soil quality and waste,
tailings and other materials treatment and disposal. Effective January 1, 2003, we adopted a new accounting standard of the Canadian Institute of
Chartered Accountants (CICA) relating to asset retirement obligations. This standard significantly
changed the method of accounting for asset retirement obligations as discussed in note 2 to the
2004 consolidated financial statements. The estimate of the total liability for asset retirement
obligations has been developed from independent environmental studies, which include an evaluation
of, among other factors, information available at that time with respect to closure plans and
closure alternatives, the anticipated method and extent of site restoration using current costs and
existing technology, and compliance required by presently enacted laws, regulations and existing
industry standards. The total liability for asset retirement obligations represents estimated
expenditures associated with closure, progressive rehabilitation and post-closure care and
maintenance. Potential recoveries of cash or other payments from the future sale of assets upon
the ultimate closure of operations have not been reflected in the estimate of the total liability
or related annual provisions or charges. Future changes, if any, to the estimated total liability,
as a result of changes in requirements, laws, regulations and operating assumptions may be
significant and would be recognized prospectively as a change in accounting estimate, when
applicable. Although the ultimate amount to be incurred is uncertain, the total present value of
the liability for asset retirement obligations in respect of our worldwide operations to be
incurred primarily after cessation of operations was estimated to be $174 million (including a
current portion of such total obligation of $3 million) at December 31, 2004 based upon certain
discount rates and timing with respect to when these costs would be expected to be incurred. Changes made in 2000 to mining regulations in the Province of Ontario require us to provide
letters of credit or other forms of financial assurance intended to secure our ability to meet
future reclamation and restoration costs, which are not expected to be incurred for many years, if
we were to no longer meet certain minimum investment grade credit ratings for our outstanding
publicly traded debt securities. Although our debt securities are currently rated investment
grade, they were rated below investment grade in recent times and there can be no assurance that
this situation will not reoccur. If we are not able to maintain the minimum investment grade
credit ratings, it is currently estimated that letters of credit or other forms of financial
assurance associated with the currently estimated costs of the eventual future closure of our mines
and other facilities in Ontario would have to cover approximately $762 million in such closure
costs on an undiscounted basis. Due to the closure of three mines in Ontario, in 2002 we were
required under such mining regulations to provide letters of credit in the amount of $22 million at
that time to secure these near-term closure costs as discussed below. In addition, we are subject
to certain Indonesian regulations which require us to provide security for the reclamation of land
areas that have been mined. In the case of our Manitoba operations, in 2003 we submitted closure
and reclamation plans for all our operations in that province and in 2004 we provided, as discussed
above, financial assurance in the form of a letter of credit in the amount of approximately $0.4
million for certain future reclamation and restoration costs in that province. It is possible that
this province may require additional financial assurance with respect to our operations in
Manitoba. However, it is not currently expected that these costs for our Indonesian operations
and/or such additional financial assurance as might be required to be provided for our Manitoba
operations will be of a material amount. These potential costs might not be incurred until many
years in the future. If these requirements for letters of credit or other forms of financial
security had to be satisfied, they could have an adverse effect on the amounts available for
borrowing by us under our bank credit facilities. In February 2002, the Ontario government issued a control order (February 2002 Order) that
requires us to reduce sulphur dioxide emissions by 34 per cent from the current limit of 265,000
tonnes to 175,000 tonnes at our Ontario smelting operations by the end of 2006. We are currently
implementing an investment of approximately $90 million in fluid bed roaster off-gas scrubbing 112




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technology intended to reduce sulphur dioxide emissions to the new levels mandated by this new
control order by the end of 2006. As part of the control order, we will also be required to (i)
reduce ground level concentrations of sulphur dioxide, (ii) continue research into the technology
and economics of further reductions in sulphur dioxide emissions and (iii) report annually to the
Ontario Ministry of the Environment and the public on the progress of this research program. The
February 2002 Order calls for a final report on achieving the additional reductions to be submitted
by December 31, 2010. We do not currently expect that compliance with the annual sulphur dioxide
emission levels from our smelter operations or ground level concentrations levels as set forth in
the February 2002 Order will have any significant effect on our costs, operating procedures or
annual production of nickel and other primary metals from our Ontario operations. In June 2004,
the Ontario Ministry of Environment released a discussion paper on new regulatory proposals for an
Industrial Emission Reduction Program (IERP). The IERP would require reductions in sulphur dioxide
emissions by 2015 that would equate to a 75 per cent reduction from the existing limit of 265,000
tonnes per year referred to above. In mid-February 2005, a draft regulation covering such proposed
reductions was issued. We have responded to these proposed reduction proposals included in the
IERP, indicating what our current ability to meet these requirements would be, particularly in view
of the current limits of existing sulphur dioxide emission control technologies. We currently
believe that the proposed reductions set forth as part of the IERP and the draft regulation will be
included in legislation to be drafted in 2005 for comment. If such proposed reductions were to
become law, we believe that those reductions would be consistent until 2015 with the requirements
of the February 2002 Order and we would, accordingly, be able to meet those proposed reductions
through 2015. However, if the reductions proposed by the IERP and the draft regulation for 2015 and beyond were to come
into effect, we cannot predict whether, based upon the limits of existing technologies and the
costs required to implement changes in our processes or otherwise, we would be able to meet them on
a cost effective basis. In September 2004, the Canadian federal environmental agency, Environment Canada, published a
notice indicating its intention, under the requirements of the Canadian Environmental Protection
Act, to control emissions from base metal smelters and refineries using pollution prevention
planning and a code of best practices for this sector. The notice also indicated a set of emission
targets that each smelter in Canada, including our facilities in Ontario and Manitoba, would be
expected to meet. Environment Canada has provided for an eighteen-month period, commencing in
September 2004, for companies to indicate whether they could develop a plan to meet their proposed
new targets on certain emissions. We are currently assessing the implications of the proposed
targets on emission limits developed by Environment Canada on our operations and have been
discussing with Environment Canada and other parties how to develop an approach to such proposed
limits that will meet the objectives of all parties. While we are not able to determine the
effect, if any, that the IERP proposed reductions and these other recent developments and other
significant future changes in regulatory emission limits and other environmental laws and
regulations that may be enacted in the future may have on our operations, due to the uncertainty
surrounding the timing and ultimate form that such changes may take, any such changes could have a
material adverse effect on our business, results of operations, financial condition and liquidity. As of December 31, 2004, we had outstanding letters of credit in the amount of $23 million to
secure a portion of our closure costs related to the closure of three mines in Ontario. These
letters of credit have a term of one year and will automatically renew without any action by either
us or the counterparty until the earlier of (i) Inco having complied with the terms of the
certified closure plans or (ii) funds from such letters of credit being utilized by the Ontario
Ministry of Northern Development and Mines, the ministry responsible for overseeing such closure
plans, to perform rehabilitation work if we did not meet the requirements with respect to such
closure plans. We are required to submit annual updates on changes to the closure plans, including
any decommissioning and rehabilitation work completed during the previous year. We have also
provided letters of credit or similar forms of financial assurance to secure future closure costs
associated with certain other operations or projects in North America and elsewhere which currently
have, or are expected to have, fairly extended useful lives. We have also provided a letter of
credit in the amount of approximately $7 million covering certain remediation costs if we abandoned
the construction of certain infrastructure at Voiseys Bay. Canada signed and ratified the Kyoto Protocol to the United Nations Framework Convention on
Climate Change (Kyoto Protocol) in December 2002. The Kyoto Protocol calls for significant
reductions in the emissions of greenhouse gases, such as carbon dioxide, and nationwide ceilings on
such emissions. In November 2002, the federal government of Canada released an initiative to
address certain causes of climate changes. The specific requirement of this initiative is also to
limit the discharge of carbon dioxide and other greenhouse gases. Neither the Kyoto Protocol nor
this other initiative has as yet established what the specific allocation of reductions among
various sources of greenhouse gases would be. In August 2003, the federal government of Canada
released certain principles covering the Kyoto Protocol intended to be used to implement the
objective of having the oil and gas, thermal energy and mining and manufacturing sectors reduce
greenhouse gases by certain specified limits. While during 2004 there was relatively little
progress on advancing the implementation of greenhouse gas emission reductions as part of the Kyoto
Protocol, the Kyoto Protocol was ratified or confirmed on an international basis in mid-February
2005. While the precise impact of the Kyoto Protocol and its ratification or confirmation on our
operations in Canada and the operations of others who provide energy or other products or services
to us is uncertain at this time, we anticipate that compliance with these initiatives could have a
significant adverse effect on our results of operations and costs. 113




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In 2002, the Danish Environmental Protection Agency (the Danish EPA), as part of the
authority granted to it under certain environmental regulations of the European Union Commission
intended to control the risk to humans and the environment from certain chemicals and other
substances, published draft risk assessment reports, including certain conclusions concerning
potential human health hazards associated with nickel metal and certain soluble nickel compounds,
including nickel sulphate, nickel chloride and nickel nitrate. Under this European regulatory
framework, there are generally four stages associated with the risk assessment process covering
substances such as chemicals and other materials: data collection, priority setting, risk
assessment and risk reduction. The Danish EPA determined that, based on certain animal studies,
soluble nickel is a reproductive toxin and has proposed certain product labelling requirements as a
result of this determination. It has also assessed certain other environmental issues. In
addition, based upon the draft reports released in 2002 and taking into consideration certain
studies, the Danish EPA has proposed that soluble nickel be classified under its hazard
classification system as a known human carcinogen. In 2004, European Union member states agreed
that soluble nickel compounds should be classified as a category 1 (known human carcinogen)
carcinogen and a category 2 (based on animal studies) reproductive toxin. It was also proposed
that metallic nickel will be classified as a category 3 (suspected) carcinogen. These revised
classifications would mean changes in product labelling, communication to workers and customers and
the development of risk management measures for these forms of nickel. The Danish EPA has,
however, concluded that there was insufficient information to complete its environmental risk
assessment, and in 2004 collaborative studies were undertaken to collect data on the behaviour of
nickel in the environment and European background levels and emission sources. It is currently
expected that there will be sufficient information to complete the environmental risk assessment in
late 2005 or early 2006 while the health risk
assessment is currently expected to be finalized in 2005. The next stage in this regulatory
process will be the implementation of risk management and risk reduction practices for those nickel
substances considered in the risk assessment. In the development of such requirements, the
authorities are obligated to take into account technical feasibility and socio-economic
considerations. Some of the risk reduction practices that may be considered include modifications
to material safety data sheets, the introduction of labelling describing the hazards and more
restrictive packaging of soluble nickel compounds, lowering of the European occupational exposure
limit for nickel and stricter engineering controls, including total containment of nickel
processes. If the requirements currently being considered as part of such risk assessments were to
come into effect, it could result in use restrictions and other requirements which could have a
material adverse effect on certain nickel producers and end users of the forms of nickel covered by
such classifications, and on our business, results of operations, financial condition and
liquidity. The revised classification would also mean changes in labelling, communication to
workers and customers and the development of risk management measures. Member states of the
European Union will have until 2010 to achieve certain target limit values for nickel, after which
more stringent binding limit values may be considered. The technical and socio-economic
feasibility of meeting such limits are currently being considered by the European Union Commission
and those industries that would be affected, including nickel producers. Further changes in environmental laws, restrictions on our discharge of greenhouse gases as a
result of Canadas program to comply with the Kyoto Protocol and similar developments that may be
imposed, as well as the collection of new information on existing environmental conditions and
other events, including legal proceedings brought based upon such conditions or an inability to
obtain necessary permits, could require us to make significant other expenditures or could
otherwise have a material adverse effect on our business, results of operations, financial
condition and liquidity. The changes outlined above and other changes in environmental legislation could have a
material adverse effect on demand for our products, product quality and methods of production and
distribution. The complexity and breadth of these issues make it extremely difficult to predict
their future impact on us. We currently anticipate capital expenditures and operating expenses
will increase in the future as a result of the implementation of existing and new and increasingly
stringent environmental regulations. Compliance with environmental legislation can require
significant expenditures and failure to comply with environmental legislation may result in the
imposition of fines and penalties, liability for clean up costs, damages and the loss of important
permits. There can be no assurance that we will at all times be in compliance with all environmental
regulations or that steps to bring us into compliance would not materially adversely affect our
business, results of operations, financial condition or liquidity. We may also be subject to
claims from persons alleging that they have suffered significant damages as a result of the
environmental impact of our operations, including facilities that have ceased to operate for many
years. 
 Other Risks and Uncertainties 
 PT Inco Our investment in PT Inco at book value as of December 31, 2004 totalled $392 million. In
addition, a lender to PT Inco currently has the right, under certain circumstances, to require one
of our wholly-owned subsidiaries to purchase approximately $18 million in 114




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debt extended to PT Inco
by that lender. In 1999, to meet PT Incos cash shortfalls attributable principally to the
increase in the capital cost of the new hydroelectric facilities which were part of PT Incos
expansion project, the relatively low nickel prices, and constraints on PT Incos production
attributable to then reduced hydroelectric power generation caused by below average rainfall, we
advanced $88 million to PT Inco. These advances were effectively repaid in 2002. To the extent
that PT Inco would experience cash shortfalls in the future, particularly if there were to be a
significant decline in primary nickel demand and nickel prices, we may again conclude that it would
be necessary to advance cash to PT Inco in order to meet PT Incos cash needs. For 2005, PT Incos production is expected to represent about one-third of our total planned
production. The uncertain political situation and security concerns in Indonesia, primarily as a
result of the ongoing economic, political and social problems facing that country, could adversely
affect PT Incos ability to operate. Based upon certain recent regulations and other developments
relating to mining activities in areas designated as protected forests under legislation passed in
Indonesia in 1999, PT Inco could be restricted from mining in certain areas it is authorized to
mine under its Contract of Work with the Indonesian government and such a development could
adversely affect PT Incos long-term mine plans and overall production levels. While there has
been no indication that the Government of the Republic of Indonesia is considering currency
controls, nationalization of certain properties or facilities or other similar actions, regional
and local governmental authorities have sought to take greater control of the development of their
resources and these or other political developments, including, but not limited to, the possibility
of disruptions in PT Incos operations arising out of the actions of non-governmental organizations
or community activist groups, could have a material adverse effect on PT Incos, and our overall,
nickel production levels, business, results of operations, financial condition and cash flow from
operations. 
 Risks Associated with, and Importance of, Future Low-Cost Nickel Projects As part of our strategy to be the worlds lowest cost and most profitable nickel
producer, we have continued our efforts to develop new low-cost sources of nickel. Following the
completion of the PT Inco expansion project in late 1999, we have focused, as discussed above, on
our Voiseys Bay nickel-copper-cobalt project and our Goro nickel-cobalt project. A number of
risks and uncertainties are associated with the development of these projected low-cost sources of
nickel and other metals, including political, regulatory, design, construction, labour, operating,
technical and technological risks, uncertainties relating to capital and other costs and financing
risks and, in the case of Goro, risks related to the possible future transition to independence of
New Caledonia. There have been periodic attempts by certain local groups in the area of the Goro
project site to disrupt operations and activities at that site and related areas, including most
recently in early 2005. While the local authorities took appropriate action in response to these
recent disruptions, we cannot predict whether these local groups will continue to seek to disrupt
such operations and activities and what effect, if any, such actions will have on the construction
of the Goro project. In addition to the risks and uncertainties referred to above, there are certain issues that
must be resolved to enable the commercial development of each of these projects to be realized.
For the Goro project, we still need to receive all of the necessary construction, environmental and
operating permits. In the case of our Voiseys Bay project, we still need to receive certain
approvals or permits before we can begin commercial production. While we currently anticipate that
we will be able to obtain all such remaining permits on a timely basis, any failure to obtain, or
delay in the issuance of, such permits could adversely affect the start-up of the Voiseys Bay
project and the construction of the Goro project. In addition, we will need to continue to meet
the terms and conditions under the definitive agreements covering the development of the Voiseys
Bay project reached in October 2002 between the Government of Newfoundland and Labrador and us,
including the completion of construction of a demonstration plant to test hydrometallurgical
processing technologies expected to be completed and in operation in late 2005. Depending upon the
levels of cash flows we are able to generate, we may also need to secure financing for the
completion of the development of the second and third phases of the Voiseys Bay project and the
Goro project on acceptable terms. In connection with the significant financing required for completion of the development of the
Goro project and the second and third phases of the Voiseys Bay project, we currently expect that,
in order to be able to meet such financing needs, we could be required to borrow additional funds,
issue additional equity, and/or enter into strategic or other arrangements. Our current plans
contemplate reaching definitive agreements under which Sumitomo Metal Mining Co., Ltd. and Mitsui &
Co., Ltd. would acquire up to a 21 per cent interest in Goro Nickel S.A. and assume, subject to
certain limitations, the obligation to fund their pro rata share of the capital costs of the Goro
project. There can be no assurance that these financing and investment arrangements will be
completed or that we will be able to raise additional required funds on acceptable terms when
financing is needed for either project. As discussed under Uncertainty of Production and Capital
and Other Cost Estimates below, while we have certain potential new mine development projects at
our existing operations in Canada, as well as additional resources that could be developed in
Indonesia in addition to the Voiseys Bay and Goro projects, if sufficient new low-cost sources of
nickel such as our Voiseys Bay project were not developed by us on a timely basis, we currently
believe that our overall nickel production, particularly at our Manitoba operations, could decline
beginning as early as 2006, and our nickel unit cost of production could increase significantly
with any material decline 115




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in mine production from our Ontario and Manitoba operations if such
operations were not significantly restructured. These developments could materially adversely
affect our business, results of operations, financial condition and liquidity. 
 Uncertainty of Production and Capital and Other Cost Estimates A decrease in the amount of and a change in the timing of our production outlook for the
metals we produce, in particular nickel, will directly impact the amount and timing of our cash
flow from operations. A 10 per cent reduction in the amount of consolidated planned production of
all metals produced would decrease cash flows estimated for 2005 by approximately $230 million
based on metal prices and costs at December 31, 2004. The actual impact of such a decrease on such
cash flow from operations would depend on the timing of any changes in production and on actual
prices and costs. In the case of our Canadian and United Kingdom operations, the time from initial
production to collection of cash from the sale of nickel products produced by these operations is
approximately 22 weeks, while the time between production of copper and cash collection from copper
sales is about 20 weeks. The production of most of our precious metals requires the transfer of
precious metals-containing materials to our Acton refinery in the United Kingdom and the processing
time at that facility generally results in cash collection taking about 28 weeks from first
production of such materials in our Ontario operations. In the case of PT Inco, the time between
nickel-in-matte production, refining of that intermediate product through our Asian refineries and
collection of cash from the sale of such refined products is approximately 10 weeks. Any change in
the timing of these cash flows that would occur due to production shortfalls or labour disruptions
would, in turn, result in delays in receipt of such cash flows and in using such cash to reduce
debt levels and may require
additional borrowings to fund capital expenditures, including capital for our development
projects, in the future. In addition, a number of these and other developments or events,
including changes in credit terms, product mix, demand for our products and production disruptions,
could make historic trends in our cash flows lose their predictive value. The level of production and capital and operating cost estimates relating to our Goro and
Voiseys Bay projects and other projects, which are used in establishing ore/mineral reserve
estimates and for determining and obtaining financing and other purposes, are based on certain
assumptions and are inherently subject to significant uncertainties. It is very likely that actual
results for our Voiseys Bay and Goro projects will differ from our current estimates and
assumptions, and these differences may be material. In addition, as discussed below, experience
from actual mining or processing operations may identify new or unexpected conditions which could
reduce production below, and/or increase capital and/or operating costs above, our current
estimates. If actual results are less favorable than we currently estimate, our business, results
of operations, financial condition and liquidity could be materially adversely impacted. 
 Goro In October 2004, we announced that, having completed and successfully achieved the key
objectives of the second, or Phase 2, of the Goro project review, we would proceed with the
development of our Goro nickel-cobalt project in New Caledonia. A key objective of Phase 2 of the
Goro review was to achieve a reliable and acceptable capital cost estimate for the project. This
review, which proceeded in two phases, had begun following the decision made in December 2002 to
suspend the project. The final results of the review have included an updated capital cost
estimate of $1,878 million for the mine, process plant and related infrastructure, within a minus 5
per cent to plus 15 per cent reliability range. This estimate included $294 million for mine,
process plant and related infrastructure capital expenditures that had already been made through
September 30, 2004 and which will continue to have use in the reconfigured project scope. This
capital cost estimate also included $40 million for assumed escalation in costs during the
construction phase of the project, an amount that was not in previous capital cost estimates, and
also reflected favourable currency hedging gains realized by Inco of about $31 million which were
also not included in previous estimates. The principal reasons for the increase from the $1,850
million capital cost estimate we had announced on May 25, 2004 were for a range of construction
materials and labour required for construction and the incorporation of a new tailings storage area
as part of the project. Phase 2 of the project review also focused on a number of other key objectives, including (1)
a viable project implementation schedule and clear project execution plan, (2) a prudent financing
plan taking into account our projected cash flow potential to fund our expected share of the
capital costs of the project, (3) an experienced and dedicated team for both the construction and
operating phases and (4) optimizing the Goro projects planned process plant design and engineering
requirements while also meeting specific objectives on project operability, maintainability, risk
mitigation and environmental protection. The final results of Phase 2 of the review met all of
these key objectives. Consistent with the preliminary results of Phase 2 of the review announced
in May 2004, the projects process plant footprint area was reduced by approximately 50 per cent
from its original plan, reducing the quantities of bulk materials required, enhancing the
efficiency of the planned process plant from an operational and maintenance perspective, and
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In moving forward with Goro, the project is expected to focus initially on engineering work,
with mobilization for construction at the Goro site expected to begin the second quarter of 2005.
Based upon the final results of Phase 2 of the review, the project construction schedule is
currently estimated to be approximately 35 months in length, with initial production estimated to
begin in late 2007. We currently plan that, as part of the project schedule, the Goro project would reach about 75
per cent of its expected annual capacity of 60,000 tonnes of nickel within 12 months after initial
production, and would be at approximately 90 per cent of that expected annual nickel capacity
within two years after initial production. As part of the results of the Phase 2 review, the Goro
projects expected cobalt capacity was revised to a current range of 4,300 to 5,000 tonnes per year
to take into account the optimized mine plan for the project. 
 Operations During 2002, as mine production at our Manitoba operations transitioned from the Thompson
mine to the lower grade Birchtree Mine, we experienced lower mine production. We continued to
experience such lower mine production in 2004 and, as this transition continues to move forward, we
currently expect to see a continuing decline in mine production in Manitoba in 2005 and expect to
see further declines in future years. We have recently been relying upon, and expect that we will
continue to rely at least for 2005, on an increasing basis, upon the availability of purchased
nickel intermediates to maintain Manitobas nickel production at around the 45,000
tonne annual level. We currently expect that, with the planned availability of Voiseys Bay
intermediate nickel concentrate for processing at our Manitoba operations beginning by late 2005 or
early 2006, these operations are expected to produce finished nickel products at or above the
45,000 tonne annual level over at least the 2006  2011 period, after which we currently expect to
see, absent the availability of other cost-effective sources of intermediate product for
processing, a decline in annual production beginning as early as 2012. We have relied upon two Australian suppliers of purchased intermediates to maintain production
at or near capacity principally at our Manitoba and, to a lesser extent, at our Ontario operations.
If these suppliers experienced problems in producing or shipping to Canada their intermediate
products, these events would have an adverse effect on our ability to produce and sell the nickel
products we plan to produce in 2005 and would adversely affect our results of operations, financial
condition, profitability and cash flows. Extended strikes, such as the one we experienced at our
Ontario operations in 2003, other labour disruptions and unforeseen events could also adversely
affect our production plans and costs and these developments could also adversely affect our
results of operations, financial condition and cash flows. 
 Voiseys Bay The current capital cost estimate for phase one of the Voiseys Bay project is $920
million. Given that a significant portion of these costs have been, or will be, incurred in
Canadian dollars, we entered, as discussed under Risks and Uncertainties above, into Canadian
dollar derivative instruments for approximately 66 per cent of the total expected costs in Canadian
dollars to be incurred in 2005 for the projects related assets. 
 Construction Risks and Technological Risks The mine, processing plant and related infrastructure required for the development of the
Voiseys Bay and Goro projects have not yet been constructed and no commercial mining has
commenced. While construction of the initial phase of the Voiseys Bay project is expected to be
completed in the summer of 2005, only certain of the necessary construction and other permits have
been obtained in respect of the Goro project. While detailed exploration and related studies with
respect to the Goro project have been completed based on (1) significant surface exploratory
drilling, (2) extensive investigations of certain of the mineralization delineated to date, (3)
construction and mine plans, and (4) production and cost estimates, we are not currently in a
position to predict with certainty when all of the required remaining approvals would be in place
for us to complete construction of the first phase of the Goro project by late 2007. Unforeseen conditions or developments could arise during the construction period for either
project which could delay or prevent completion, and/or substantially increase the cost of
construction of the necessary facilities and infrastructure to develop either project, in
particular the Goro project. Such events may include, without limitation, shortages of equipment,
materials or labour, delays in delivery of equipment or materials, labour disruptions, political
events, local or political opposition, civil disturbances, litigation, adverse weather conditions,
unanticipated increases in costs, natural or man-made disasters, accidents and unforeseen
engineering, technical and technological, design, environmental, geological or geotechnical
problems. Any delay in construction would delay the 117




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production of nickel and other products from
the Voiseys Bay and/or Goro projects, and the expected significant source of revenue for us that
production from these projects would represent. Any such delay could also materially adversely
impact our business, results of operations, financial condition and liquidity. Our Goro project
will involve the application of new processing and other technologies and, depending upon the
results of the hydrometallurgical research and development program we are conducting for our
Voiseys Bay project, as described above, that project could also utilize new processing and other
technologies to produce one or more refined or finished nickel products. There can be no assurance
that these technologies will be successfully developed and applied on a commercial basis or that
the costs associated with and/or the timing of their implementation will not have a material
adverse effect on the timing of the start-up of commercial production, the capital and/or operating
costs for either or both projects and on other factors impacting the profitability of these
projects. These events could materially adversely impact our business, results of operations,
financial condition and liquidity. 
 Governmental Regulations In addition to environmental regulations referred to above, the mining and metals
industry in Canada operates under federal, provincial and municipal legislation, regulation and
intervention by governments in such matters as land tenure, limitations on areas in which mining
can be conducted, production rates, income and other taxes and the export of ore and other
products, as well as other matters. Our operations in Indonesia, the United Kingdom, New Caledonia
and in other countries outside Canada are also subject to various environmental and other
applicable laws and regulations and governmental interventions, some of which are similar to those
in Canada and all of which are subject to change. The mining and metals industry is also
subject to regulation and intervention by governments in such matters as control over the
development and abandonment of mine sites (including restrictions on production) and possible
expropriation or cancellation of contract and mineral rights. Before proceeding with major
projects, including significant changes to existing operations, we must obtain certain regulatory
approvals. The regulatory approval process can involve stakeholder consultation, environmental
impact assessments and public hearings, among other things. In addition, regulatory approvals may
be subject to conditions, including the obligation to post security deposits and other financial
commitments. Failure to obtain regulatory approvals, or failure to obtain them on a timely basis,
could result in delays and abandonment or restructuring of projects and increased costs, all of
which could negatively affect our profitability and cash flows. In addition, such regulations may
be changed from time to time in response to economic or political conditions, and the
implementation of new regulations or the modification of existing regulations affecting the mining
and metals industry could increase our costs and have a material adverse impact on our business,
results of operations, financial condition and liquidity. There can be no assurance that we will be in compliance with all applicable laws or
regulations at all times or that steps to bring us into compliance would not materially adversely
impact our business, results of operations, liquidity or financial condition. Reference is made to
Risks and Uncertainties  Environmental Risks above. 
 Capital Requirements and Operating Risks As discussed under Cash Flows, Liquidity and Capital Resources and Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations above, each of our two current principal
primary metals business units, the Canadian and United Kingdom operations and PT Inco, has
required, and is expected to continue to require, certain levels of investment to sustain their
current levels of production. For 2005, as discussed under Outlook  2005 Planned Capital
Expenditures below, we currently forecast capital expenditures totalling approximately $1,450
million, covering sustaining capital expenditures for our current primary metals business units as
well as planned expenditures for our Goro and Voiseys Bay projects and other development projects.
This total amount assumes a level of capital expenditures, including capitalized interest, in 2005
for our Goro project of $560 million and $410 million for our Voiseys Bay project. To meet such
capital expenditures requirements for 2005 and at least for 2006 in the case of the Goro project
and for our PT Inco program to increase its production as discussed above given the current
projected total capital expenditures for these development projects and programs, we must generate
sufficient internal cash flows and/or be able to utilize available financing sources. If we do not realize satisfactory prices for the nickel and other metals that we produce, we
could be required to raise very significant additional capital through the capital markets and/or
incur significant borrowings to meet our capital requirements. These financing requirements could
adversely affect our credit ratings and our ability to access the capital markets in the future to
meet any external financing requirements we might have. If there are significant delays in when these projects are completed and are producing on a
commercial and consistent scale, and/or their capital costs were to be significantly higher than
estimated, these events could have a significant adverse effect on our results of operation, cash
flow from operations and financial condition. 118




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In addition, our mining operations and processing and related infrastructure facilities are
subject to risks normally encountered in the mining and metals industry. Such risks include,
without limitation, environmental hazards, industrial accidents, labour disputes, changes in laws,
technical difficulties or failures, late delivery of supplies or equipment, unusual or unexpected
geological formations or pressures, cave-ins, pit-wall failures, rock falls, unanticipated ground,
grade or water conditions, flooding, periodic or extended interruptions due to the unavailability
of materials and force majeure events. Such risks could result in damage to, or destruction of,
mineral properties or producing facilities, personal injury, environmental damage, delays in mining
or processing, losses and possible legal liability. Any prolonged downtime or shutdowns at our
mining or processing operations could materially adversely affect our business, results of
operations, financial condition and liquidity. The wholesale electricity markets in Ontario were deregulated for a portion of 2002 and as a
result we have experienced fluctuations in some of our electricity costs at the Ontario operations.
The Ontario government announced new electricity rates for industrial users in February 2005.
These new rates are between 8 to 12 per cent higher than rates that prevailed in 2004 and are
effective as of April 1, 2005. Depending upon future changes in the regulatory environment for
electricity markets, we could experience future fluctuations in such costs. We have from time to
time experienced adverse production and production cost trends at our operations in Canada and
elsewhere and could experience similar adverse trends in the future. 
 Labour Relations New collective agreements with unionized hourly production and maintenance workers at our
Ontario operations were entered into on August 29, 2003 and will expire on May 31, 2006. These
agreements were reached following a three-month strike that had a material adverse effect on our
2003 production of nickel, copper and certain other metals and our results of operations, financial
condition, profitability and cash flow from operations for 2003. A three-year collective agreement
with our unionized office, clerical and technical employees at our Ontario operations was
negotiated in the first quarter of 2004 and remains in effect until March 31, 2007. On September
15, 2002, a new three-year collective agreement with our unionized workers at our Manitoba
operations was successfully negotiated. That agreement expires in September 2005. We cannot
predict at this time whether we will be able to enter into a new collective agreement without a
labour disruption when the current agreement expires. Our PT Inco subsidiary entered into a new
two-year collective labour agreement with its union in the fourth quarter of 2004 which expires in
December 2006. While there were no significant problems in reaching this latest agreement with PT
Incos labour force, with the increased potential for actions of non-government organizations and
other activist groups, the continuing uncertain economic and political situation in Indonesia and
the general increase in labour activism in that country, there can be no assurance that such
activism will not adversely affect PT Incos ability to successfully operate. Any disruption in PT
Incos operations as a result of labour issues or other issues may adversely affect its operations
and could materially adversely impact our business, results of operations, financial condition and
liquidity. At Goro, we currently have two unions representing some of our employees. In early
September 2002, Goro experienced labour disruptions by personnel associated with certain project
construction subcontractors. As a result of these disruptions, the decision was made in late
September 2002 to curtail certain activities at the projects site to enable the project company,
Goro Nickel S.A., contractors, subcontractors and other interested parties to develop procedures to
avoid future disruptions. A number of procedures were put in place prior to the start of the Goro
project comprehensive review in late 2002 and over the past two years we have been seeking to
complete the implementation of these and other procedures as part of the negotiation of labour,
site or other accords to help minimize any such disruptions in the future. Through an employers
association, of which we are the controlling member, we negotiated a collective agreement effective
September 2002 covering the construction of the first phase of the Voiseys Bay project. There can be no assurance that we will be able to maintain positive relationships with our
employees at our operations in Canada, Indonesia and elsewhere or that new collective agreements
will be entered into without work interruptions as in the case of the three-month strike at our
Ontario operations in 2003. We could also be adversely affected by labour disruptions involving
third parties who may provide us with goods or services at our operations in Canada and elsewhere.
For example, as discussed above, our Goro project experienced labour disruptions by certain
employees of the projects construction subcontractors. Strikes and other labour disruptions at any
of our operations and lengthy work interruptions at our Goro and/or Voiseys Bay projects could
materially adversely affect the timing of completion and the cost of either project, as well as our
business, results of operations, financial condition and liquidity. 
 Uncertainty of Ore/Mineral Reserve Estimates Our reported ore/mineral reserves as of December 31, 2004 are estimated quantities of
proven and probable ore that, under present and anticipated conditions, can be legally and
economically mined and processed by the extraction of their mineral content. The volume and grade
of reserves actually recovered and rates of production from our present ore/mineral reserves may be
less than geological measurements of the reserves. Furthermore, market price fluctuations in
nickel, other metals and exchange rates, and 119




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changes in operating and capital costs may in the
future render certain ore/mineral reserves uneconomic to mine and could, accordingly, result in
significant reductions in our reported estimates of proven and probable ore/mineral reserves. We
determine the amount of our estimated ore/mineral reserves in accordance with the requirements of
the applicable securities regulatory authorities and established industry practices. To the extent
that we are required by regulatory authorities to change the metal prices, expenditures and other
assumptions we use in preparing these estimates, then these estimates could change significantly. No assurance can be given that the indicated amount of ore will be recovered or that it will
be recovered at the rates anticipated by us. Our ore/mineral reserve estimates are based on
limited sampling and, consequently, are uncertain because the samples may not be representative of
the entire orebody. As more knowledge and understanding of the orebody is obtained, the reserve
estimates may change significantly, either positively or negatively. 
 Sensitivities Our financial results are sensitive to, among other things, changes in prices for nickel
and other metals, the Canadian-U.S. dollar exchange rate and interest rates. Our financial results
are also affected by changes in the Indonesian rupiah-U.S. dollar exchange rate, but to a lesser
extent since PT Incos revenues and many of its expenses are denominated in U.S. dollars. We have
calculated the impact on our basic net earnings per share of a 10 per cent change in the market
risk exposures that we believe have the most
significant impact on our net earnings. The following table shows the approximate full-year
impact of a 10 per cent change in our principal market risk exposures on our basic net earnings per
share based on planned 2005 deliveries of Inco-source metals and after taking into consideration
our principal derivative instrument positions as of December 31, 2004. These market risk exposures
have been selected as management believes they have had, and are currently expected to continue to
have, the most significant impact on our net earnings per share: Impact on Basic NetSensitivities as of December 31, 2004
    
    10% change
    
    Earnings per Share1MetalsNickel
    $
    0.68 per pound
    
    $
    0.80Copper
    
    0.15 per pound
    
    
    0.12Cobalt
    
    1.86 per pound
    
    
    0.02Platinum
    
    86 per troy ounce
    
    
    0.05Palladium
    
    18 per troy ounce
    
    
    0.01EnergyFuel Oil
    
    2.83 per bbl
    
    
    0.02Natural Gas
    
    0.74 per MM BTU
    
    
    0.01CurrenciesU.S. $1.00 per Cdn$
    
    0.083 cents
    
    
    1.19U.S. $1.00 per Indonesian rupiah (per thousand)
    
    0.01 cents
    
    
    0.01Share appreciation rights
    
    3.70 per share
    
    
    0.02
   1
    
    Canadian GAAP basic net earnings per share. Each sensitivity assumes
other factors are held constant. As indicated in the table above, the most significant sensitivities in terms of the
effect on our basic net earnings per share are nickel prices and the Canadian dollar-U.S. dollar
exchange rate. Cash expenditures for our development projects will be incurred primarily in Canadian dollars
for our Voiseys Bay project and in Australian dollars and Euros for our Goro project. Although
changes in these currencies will affect the ultimate carrying value of the related assets in U.S.
dollar terms, they will not have any impact on our earnings until such projects are fully developed
and operating. A 10 per cent change in each of the value of the Australian dollar and Euro
relative to the U.S. dollar as at December 31, 2004 would change currently planned 2005 capital
expenditures for the Goro project by $4 million and $11 million, respectively, after taking into
consideration outstanding derivative contracts as at December 31, 2004. A 10 per cent change in
the value of the Canadian dollar relative to the U.S. dollar at December 31, 2004 would change
planned 2005 capital expenditures for the Voiseys Bay project by $12 million after taking into
consideration outstanding derivative instruments as at December 31, 2004. Reference is made to
Foreign Exchange Risk under Risks and Uncertainties above. The following represents the sensitivity analysis as of December 31, 2003 prepared using the
same methodology as above for comparative purposes: 120




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Impact on Basic NetSensitivities as of December 31, 2003
    
    10% change
    
    Earnings per Share1MetalsNickel
    $
    0.76 per pound
    
    $
    0.89Copper
    
    0.10 per pound
    
    
    0.09Cobalt
    
    2.23 per pound
    
    
    0.03Platinum
    
    81 per troy ounce
    
    
    0.03Palladium
    
    19 per troy ounce
    
    
    0.01EnergyFuel Oil
    
    2.44 per bbl
    
    
    0.02Natural Gas
    
    0.68 per MM BTU
    
    
    0.01CurrenciesU.S. $1.00 per Cdn$
    
    0.077 cents
    
    
    0.87U.S. $1.00 per Indonesian rupiah (per thousand)
    
    0.01 cents
    
    
    0.01Share appreciation rights
    
    4.00 per share
    
    
    0.03
   1
    
    Canadian GAAP basic net earnings per share. Each sensitivity assumes
other factors are held constant. While the sensitivity analyses presented in the tables above represent our best estimate
of the impact of specified assumed changes in the identified market risk scenarios, actual results
could differ from those reflected. The sensitivity analyses presented are subject to various
limitations and uncertainties which may affect the impact on basic net earnings per share. These sensitivity analyses have been prepared based on a change of 10 per cent in the market
rates or prices at December 31, 2004 and 2003. The impact on basic net earnings per share has been
determined based on discrete changes in the identified risks. If there are changes in two or more
of the identified risks, the above impact on basic net earnings per share may not accurately
reflect the actual impact on our net earnings per share. These sensitivity analyses also include assumptions relating to our current projected
operations during 2005 in the case of the sensitivity analyses as of December 31, 2004 and our
original plan for 2004 in the case of the sensitivity analysis as of December 31, 2003. As we are
affected and influenced by changes in the business and economic environments in which we operate,
the changes reflected in the sensitivity analyses above may be different or may prove to be
inaccurate, including in relation to their impact on basic net earnings per share. The most
significant assumptions which may be affected relate to levels of production, consumption rates,
forecasted costs of production, tax rates and deliveries. These sensitivity analyses provided are not intended to fully reflect the net market risk
exposures since certain exposures would encompass events that are uncertain or could not be
foreseen. Some of these events are outlined in our discussion above on Risks and Uncertainties
affecting our business. For example, with respect to metal prices, extended declines in prices,
particularly nickel prices, due to unusual economic developments or other unforeseen events would
have a material adverse effect on our results of operations, financial condition and cash flows.
In addition, unusual or irrational actions by competitors could, for example, change the nickel
market supply-demand relationship and other factors fundamental to our business causing declines in
metal prices. In addition, significant and prolonged increases in energy prices and/or the
Canadian dollar relative to the U.S. dollar would have a material adverse effect on our costs of
production, results of operations and financial condition. There are also a wide range of other
uncertainties in the business environment that could result in material limitations with respect to
the accuracy of the sensitivity analyses for net market risk exposures, including cost inflation,
relations with our employees, avoidance of major accidents at our producing locations, and the
average grades of ore mined and the certainty of estimated proven and probable ore/mineral reserves
at our operations. Unanticipated changes in environmental laws and regulations could also result
in limits on production and/or significantly increased capital spending to meet such changes. 
 Critical Accounting Estimates The preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Critical accounting estimates are those that require us to make assumptions about matters (a) that
are highly uncertain at the time the accounting estimate is made, (b) for which we could have
reasonably used a different estimate in the current period and/or (c) where changes in the
accounting estimate are reasonably likely to occur from period to period and such changes would
have a material impact on the presentation of the Companys financial condition, changes in
financial condition or results of operations. Our estimates are based upon historical experience
and on various other assumptions that we 121




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believe to be reasonable under the circumstances. The results of our ongoing evaluation of these estimates form the basis for making
judgments about the carrying value of assets and liabilities and the reported amounts for
revenues and expenses. Actual results may differ from these estimates. A summary of our
significant accounting policies, including critical accounting policies that require critical
accounting estimates, is set forth in note 1 to our 2004 consolidated financial statements. The
Companys critical accounting estimates and underlying judgments, estimates and assumptions have
been reviewed with the Audit Committee of the Companys Board of Directors. 
 Depreciation and depletion Expenditures for new facilities or equipment and expenditures that extend the useful
lives of existing facilities or equipment are capitalized and depreciated using the declining
balance or straight-line method at rates sufficient to depreciate such costs over the estimated
future lives of such facilities or equipment. These lives do not exceed the estimated operating
mine life based upon estimated proven and probable ore/mineral reserves unless we believe the asset
can be utilized in another facility after the mining operations have ended. Depletion of the deferred costs of mine development is calculated on a units-of-production
basis over the estimated proven and probable ore/mineral reserves which relate to the particular
category of development, either life of mine plan or estimated proven and probable ore/mineral
reserves for which no further capital expenditures are required. No future development costs are
taken into account in calculating the amortization charge. Life of mine plan development comprises capital expenditures that will be utilized in the
extraction of all the estimated proven and probable ore/mineral reserves in the current detailed
mine plan. These expenditures are predominantly incurred up front and in advance of any ore
extraction or in advance of major expansions. The types of development included in this category
include ore haulage shafts, initial decline, ore passes and chutes and underground ore crusher
cavities and are intended to be used for the extraction of all ore within the current mine plan.
These costs are depleted on a units-of-production basis over the total estimated proven and
probable ore/mineral reserves in the current mine plan. Development costs, which are depleted over estimated proven and probable ore/mineral reserves
for which no further capital is required, consist of capital expenditures to provide access to
various areas within the mine to allow the extraction of ore to commence. The types of development
costs that are within this category include access and perimeter drives, ventilation drives and
rises, and progressive declining subsequent to initial contact with the ore body. These costs are
depleted on a units-of-production basis over the estimated proven and probable ore/mineral reserves
that can be currently accessed without future capital development costs being incurred. The calculation of the units-of-production rate of depletion and, accordingly, the annual
depletion charge to operations, could be materially affected to the extent that actual production
in the future is different from current forecasts of production based on estimated proven and
probable ore/mineral reserves. This would generally be the case where there were significant
changes in any of the factors or assumptions used in estimating proven and probable ore/mineral
reserves. These factors could include (i) an expansion of estimated proven and probable
ore/mineral reserves through exploration activities, (ii) differences between estimated and actual
cash costs of mining, due to differences in grade, metal recovery rates and foreign currency
exchange rates from those assumed, and (iii) differences between actual commodity prices and the
commodity price assumptions used in the estimation of proven and probable ore/mineral reserves.
Such changes in estimated ore/mineral reserves could similarly impact the useful lives of assets
depreciated on a straight-line basis, where those lives are limited to the life of the mine. The
accounting estimates related to depreciation and depletion are critical accounting estimates and
are influenced by our estimates of proven and probable ore/mineral reserves. Historically, the
Company has been successful in replacing a portion of the ore/mineral reserves depleted through
mining operations. During the past six years, excluding major development projects, on average
about 60 per cent of the aggregate ore mined from our sulphide mineral deposits has been replaced
through further exploration and development activities. Depreciation and depletion charges are
adjusted prospectively based on annual year-end assessments of Companys proven and probable
ore/mineral reserves. If our estimated proven and probable ore/mineral reserves were to be
decreased by 10 per cent, there would be an increase of $5 million in our annual depletion expense. 
 Impairment We review and evaluate our long-lived assets for impairment when events or changes in
circumstances indicate the related carrying amounts may not be recoverable. An asset impairment is
considered to exist if the total estimated future cash flows on an undiscounted basis are less than
the carrying amount of the asset. An impairment loss is measured and recorded based on discounted 122




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estimated future cash flows. Future cash flows are estimated based on estimated quantities of
recoverable minerals, expected
commodity prices (considering current and historical prices, price trends and related
factors), production levels, cash costs of production, capital and reclamation costs, all based on
detailed life-of-mine plans. The term recoverable minerals refers to the estimated amount of
nickel or other commodities that will be obtained from proven and probable ore/mineral reserves and
all related mineral interests, after taking into account losses during ore processing and
treatment. Significant management judgment is involved in estimating these factors, which include
inherent risks and uncertainties. The assumptions we use are consistent with our internal
planning. Management periodically evaluates and updates the estimates based on the conditions that
influence these factors. The variability of these factors depends on a number of conditions,
including uncertainty about future events, and thus our accounting estimates may change from period
to period. If other assumptions and estimates had been used in the current period, the balances
for non-current assets could have been materially impacted. Furthermore, if management uses
different assumptions or if different conditions occur in future periods, future operating results
could be materially impacted. In estimating future cash flows, assets are grouped at the lowest levels for which there are
identifiable cash flows that are largely independent of future cash flows from other asset groups,
taking into consideration movements of intermediate products to ensure the utilization of available
capacity across our operations. All assets at a particular operation are considered together for
purposes of estimating future cash flows. We periodically review our equity method investments to determine whether a decline in fair
value below the carrying amount is other than temporary. In making this determination, we consider
a number of factors related to the financial condition and prospects of the investee, including (i)
a decline in the valuation of the equity investee for an extended period of time, (ii) an inability
to recover the carrying amount of the investment or inability of the equity investee to sustain an
earnings capacity which would justify the carrying amount of the investment, and (iii) the period
of time over which we intend to hold the investment. If the decline in fair value is deemed to be
other than temporary, the carrying value is written down to fair value. In situations where the
fair value of an investment is not evident due to a lack of a public market price or other factors,
we use our best estimates and assumptions to arrive at the estimated fair value of such investment,
based on future cash flows of the equity investee and other relevant factors. As significant
judgment is required in assessing these factors, it is possible that changes in any of these
factors in the future could result in an other than temporary decline in value of an equity
investment and could require us to record an impairment charge to operations in future periods. In 2004, we recorded an impairment loss in respect of our Goro project in the amount of $201
million. This loss was determined based on managements judgment regarding the net realizable
value for supplies and equipment that no longer had any use for the project. A 10 per cent
reduction in the assumed net recoverable value for these items would have increased the impairment
charge by $2 million. There were no impairment losses on long-lived assets recorded in 2003. In 2002, the Company
recorded an asset impairment charge of $2,415 million relating to the Voiseys Bay project and
certain other assets as set forth in the table below. At the time these impairment charges were
recorded, Canadian GAAP required the impairment loss to be measured as the difference between the
net recoverable amount, versus the fair value, as compared to carrying value. For further
information, reference is made to note 2(f) to our 2004 consolidated financial statements. Such
change was required to be applied prospectively. 2002 Asset Impairment Charge ($ millions)Voiseys Bay project
    
    $
    2,322Victor Deep project (Ontario)
    
    
    34Write-off of accounts and notes receivable
    
    
    33Write-down of production assets
    
    
    17Other
    
    
    9Total
    
    $
    2,415
 The impairment loss with respect to the Voiseys Bay project was determined using the
following assumptions:  (a)
    revenue assumptions for purposes of estimating future cash flows were based on the same
commodity prices and exchange rates used to estimate proven and probable ore/mineral
reserves at the end of 2001 as follows: nickel $3.20 per pound (LME 123




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cash nickel price); copper $1.00 per pound; cobalt $7.00 per pound (reduced from $10.00 per
pound used to estimate proven and probable ore/mineral reserves at the end of 2001) and a long-term U.S. dollar/Canadian
dollar exchange rate of $1.00  $1.43;(b)
    the estimated production of nickel and copper concentrates were based on a concentrator
operation capable of producing concentrate sufficient to refine on average 110 million
pounds of nickel per year. Initial processing of the nickel concentrate has been assumed
to be done at our Ontario and Manitoba operations for a period of years while
hydrometallurgical processing facilities are developed and built in the Province of
Newfoundland and Labrador. Thereafter processing has been assumed to occur at these new
hydrometallurgical facilities;(c)
    these production levels were based on initial production from currently established
estimated proven and probable ore/mineral reserves followed by production from underground
sources where it has been assumed that estimated proven and probable ore/mineral reserves
would be established by the start of underground mining anticipated to occur in
2017; estimates of the quantity of ore and grade that may be contained in such
underground sources, the cost of mining such ore and the capital cost of mine development
are subject to considerable uncertainty; and(d)
    the cost of operations were developed based on the definitive agreements entered into
by us with the Province of Newfoundland and Labrador that established the project scope,
tax regime applicable to the project and the size and nature of the production facilities,
among other things. Operating costs for mining and processing operations were developed
based on our experience in mining and processing similar ores at our Ontario and Manitoba
operations. Where production processes called for the use of new technology, cost
estimates were developed by our technical personnel involved in the development of the
process technologies. Estimated costs associated with the impacts and benefits agreements
entered into between us and two Aboriginal groups were also taken into consideration in
developing the overall cost of operations. The estimated proven and probable ore/mineral reserves for the Voiseys Bay project were based
on a feasibility study prepared in 1996 and have been supported by additional exploration work and
evaluations since that time. Subsequent to the impairment evaluation, we completed a bankable
feasibility study for the initial phase of the Voiseys Bay project that includes construction of
an open pit mine and concentrator, a port and related infrastructure development. Construction of
the initial phase of our Voiseys Bay project is well underway as described above. 
 Asset Retirement Obligations Our mining operations involve activities that have a significant effect on the area
surrounding such operations. We estimated our ultimate reclamation and closure costs on an
undiscounted basis would total $1,050 million. Effective January 1, 2003, we adopted CICA 3110,
Accounting for Asset Retirement Obligations. CICA 3110 requires that we record the fair value of
our estimated asset retirement obligations when a legal obligation is incurred. These liabilities
are accreted to full value over time through charges to income. The accounting estimates related to reclamation and closure costs are critical accounting
estimates because (i) we will not incur most of these costs for a number of years, requiring us to
make estimates over a relatively long period; (ii) reclamation and closure laws and regulations
could change in the future or circumstances affecting our operations could change, either of which
could result in significant changes to our current plans and future costs; (iii) calculating the
fair value of our asset retirement obligations requires management to make long-term assumptions about inflation rates, to determine our
long-term credit-adjusted, risk-free interest rates and to determine market risk premiums that are
appropriate for our operations over long periods of time; and (iv) given the magnitude of our
estimated reclamation and closure costs, changes in any or all of these estimates could have a
material impact on our results of operations and/or our financial condition. To calculate the fair value of these obligations, we discounted the projected cash flows at
our estimated credit-adjusted, risk-free interest rates which ranged from two per cent to eight per
cent for the corresponding time periods over which these costs would be incurred. The inflation
rates and discount rates we used to calculate the fair value of our asset retirement obligations
are critical factors in the calculation of future value and discounted present value costs. We
estimated the cash flows for asset retirement obligations assuming a single set of assumptions. In
general, given the nature of our business and specificity of our assets, there are very restrictive
ways in which to retire our assets and conform to the applicable environmental regulations,
including closure and related requirements. Therefore, in such instances, a range of likely
outcomes was not used because multiple approaches to retire our assets were not appropriate. We
applied a market risk premium to the total obligations to reflect what a third party might demand
to assume our asset retirement obligations. The market risk premium was based on market-based
estimates of rates that a third party would have to pay to ensure its exposure to possible future
increases in the value of these obligations. The extent and timing of 124




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expenditures on closure and reclamation activities are critical estimates for the
determination of our asset retirement obligations and the related annual charges to earnings.
These are also influenced by our estimates of our proven and probable ore/mineral reserves. As the
closure period for a substantial portion of our mines is not for a number of years, we have no
historical experience which would indicate that our current asset retirement obligations are either
understated or overstated. We continue to believe that our current closure cost estimates
represent our best estimates. In 2004, we did update our closure plan for PT Inco. The update of
this closure plan resulted in an increase of our asset retirement obligation of approximately $13
million. Since our PT Inco operations are not scheduled to close for many years, there was no
significant impact of this increase on our results of operations. If we were to advance the date
of retirement of our assets by 10 per cent from our current estimate, the impact would be an
increase in our asset retirement obligations of $50 million and the annual charge to earnings would
have increased by $1 million per year. If our estimates of the cost of closure and reclamation
activities were to change by 10 per cent, our ultimate reclamation and closure costs would change
by $105 million. In addition, there are certain environmental issues pertaining to former industrial sites that
were retained by us relating to former businesses that had been sold by us. In determining whether
a liability exists in respect of these environmental issues, we apply the criteria for liability
recognition set forth in applicable accounting standards. We regularly review the status of
environmental issues to determine whether a liability should be established or an additional
liability recognized with the corresponding charge to our earnings. 
 Future Employee Benefits and Costs Pension expense is determined separately for each of our pension plans and other
post-retirement arrangements based on the principles outlined in both Canadian and United States
accounting standards. Assets are valued using a market-related value, determined based on the
current market value and the market values in the previous four years (that is, with an averaging
of experience gains and losses over the five year period). The expected return on assets
assumption is based on current bond yields, an expected equity risk premium and an allowance for
expected value added as a result of active management, where applicable. As discussed further in
note 12 to our 2004 consolidated financial statements, we determine our return on plan assets using
a formula approach. Each year we update our return on plan assets for the most recent historical
benchmarks. Application of the respective historical benchmarks to our formula resulted in a
decrease in the assumed rate of return on assets from 8.5 per cent in 2003 to 8 per cent in 2004
and to 7.75 per cent for 2005. Liabilities are determined as a present value of future anticipated cash flows using a
discount rate based on corporate AA bond yields at the valuation date and an inflation expectation
consistent with the corporate AA bond yield curve. Differences between the estimated future
results and actual future results are amortized (to the extent that the cumulative experience gain
or loss is in excess of the permitted 10 per cent corridor under Canadian GAAP) over the expected
average remaining service life of the active members (EARSL). This 10 per cent corridor, as
defined by Canadian GAAP, represents 10 per cent of the greater of the post-retirement benefits
obligations and the fair value of plan assets. The return on assets assumption and the discount
rate, salary and inflation assumptions used to value the liabilities are reviewed annually and are
determined based on a consistent framework from year-to-year. The most significant risk is that
the assumptions will prove to be either too high or too low in the long term. It is reasonable to
assume that there will be a significant variation between the assumptions (which are set within the
framework of a long-term commitment) and actual experience in any one year. Over the long-term,
cumulative pension expense is expected to produce an appropriate reflection of the costs associated
with the pension program. The expense for other post-retirement benefits or non-pension benefits is based on a similar
methodology and similar determination of the liability value. The discount rate used is the same
as that determined for the pension obligations. The inflation rate assumed for medical costs is
based on our history of healthcare spending. The assumption for the ultimate health care trend
rates relates to the overall economic trends. With this reasoning, the ultimate trend rate is
comprised of the assumed inflation rate, real gross domestic product growth of 1.5 per cent to 2.0
per cent and health care expenditure growth rate at a slightly higher rate over the long term. We currently estimate that a 0.5 per cent increase or decrease in the return on assets
assumption would result in a corresponding $12 million decrease or increase, in annual pension
expense. Changes to the return on assets assumption would have no significant effect on required
funding requirements, as our required contributions are primarily determined based on the
applicable Canadian regulatory solvency funding requirements (that is, the windup valuation).
Under this valuation methodology, liabilities for solvency valuation are based on market bond
yields and the excess of liabilities over assets must be amortized over a five-year period. We
estimate that a 0.5 per cent increase or decrease in the discount rate assumption would result in a
corresponding $10 million decrease or increase in annual pension expense. Since we are currently
contributing more than the minimum requirements under applicable 125




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pension standards legislation and we currently plan to continue to do so over at least the
next few years, long-term bond yields would need to decline by more than one per cent from current
levels to require any increase in contributions. 
 Income and mining taxes Significant judgment, estimates and assumptions are required in determining the Companys
consolidated tax provision. In addition, in evaluating the ability of the Company to realize the
deferred tax assets, significant judgment, estimates and assumptions are required in establishing
deferred income tax asset valuation allowances. The provision or relief for income and mining taxes is calculated based on the expected tax
treatment of transactions recorded in our 2004 consolidated financial statements. The objectives
of accounting for income and mining taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in our 2004 consolidated financial statements or
tax returns. In determining both the current and future components of income and mining taxes, we
interpret tax legislation in a variety of jurisdictions, recognize liabilities for anticipated tax
audit issues based on estimates of whether additional taxes would be payable as well as make
assumptions about the expected timing of the reversal of future tax assets and liabilities. If our
interpretations differ from those of tax authorities or if the timing of reversals is not as
anticipated, the provision or relief for income and mining taxes could increase or decrease in
future periods. In estimating deferred income and mining tax assets, a valuation allowance is determined to
reduce the future income tax assets to the amount that is more likely than not to be realized.
This valuation allowance for 2004 amounted to $29 million, representing (i) $6 million in respect
of non-capital losses available to Goro Nickel S.A., (ii) $12 million in respect of net capital
losses available in the United Kingdom, (iii) $5 million in respect of reduction in the benefits of
write-downs of certain investments and (iv) $6 million reduction in the benefit of alternative
minimum tax relating to our subsidiaries in the United States. This valuation allowance for 2003
amounted to $27 million, representing (i) $3 million in respect of non-capital losses available to
Goro Nickel S.A., (ii) $12 million in respect of net capital losses available in the United States
and United Kingdom, and (iii) $12 million in respect of unrealized capital losses arising from the
write-down of certain investments and other assets. In 2002, the valuation allowance was $57
million, representing (i) $2 million in respect of non-capital losses for Goro Nickel S.A., (ii)
$20 million in respect of net capital losses in the United States and United Kingdom, (iii) $12
million in respect of unrealized capital losses arising from the write-down of certain investments
and other assets, and (iv) $23 million in respect of accrued unrealized foreign exchange losses on
foreign currency denominated long-term debt. These valuation allowances have been provided for as
it is more likely than not that these non-capital and net capital losses will not be realized for
tax purposes in the future. In each year, the amount of the valuation allowance reduces the future
income tax assets and effectively increases the amount of the net deferred income tax liabilities
and, accordingly, the provision for income and mining taxes on the earnings statement. Additional
information regarding our accounting for income and mining taxes is contained in note 7 to our 2004
consolidated financial statements. 
 Accounting Changes In 2004, we adopted three new accounting pronouncements for the purposes of our Canadian
GAAP reporting. These new pronouncements related to the accounting for variable interest entities,
the application of Canadian GAAP and hedging relationships. (As discussed in note 24 to our 2004
consolidated financial statements, we adopted a substantially similar standard with respect to
variable interest entities for United States GAAP.) In 2004, we also changed our methodology used
to calculate depletion and depreciation expense. A similar change was made for United States GAAP
reporting effective January 1, 2003, therefore, the 2004 adoption of this change for Canadian GAAP
purposes eliminated a significant GAAP difference between United States and Canadian GAAP. For
further information on these accounting changes and the impact on our consolidated financial
statements, reference should be made to note 2(a), (b), (c) and (d) to our 2004 consolidated
financial statements. Also, for United States reporting purposes, effective December 31, 2004 on a
retroactive basis, we adopted EITF Issue No. 04-08, The Effect of Contingently Convertible Debt on
Diluted Earnings Per Share. For further information on this change, reference should be made to
note 24 to our 2004 consolidated financial statements. In 2005, we have adopted two new accounting pronouncements for the purposes of Canadian GAAP
reporting. Effective January 1, 2005, on a retroactive basis, we have adopted revisions to CICA
Section 3500, Earnings Per Share. The revisions relate primarily to (1) the use of year to date
weighted average rates when applying the treasury stock method and (2) instruments where, if an
instrument can be settled in cash or shares, an entity should assume that the instrument will be
settled in shares if share settlement is more dilutive. In 2004 and prior years, we presumed, with
respect to our LYON Convertible Notes, cash settlement and, accordingly, this instrument was not
considered in the calculation of diluted earnings per share. The impact of adopting these
revisions will be a decrease in diluted earnings per share for the year ended December 31, 2004 of
13 cents per share. Also, effective January 1, 2005, on 126




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a retroactive basis, we have adopted revisions to CICA Section 3860, Financial Instruments 
Disclosure and Presentation. The revisions relate to the accounting for instruments for which the
issuer has the right to settle in cash or its own shares. Such an instrument should be bifurcated
between debt and equity in accordance with the revised standard. This change will impact the
accounting treatment for our LYON Convertible Notes, Convertible Debentures due 2023 and 31/2%
Subordinated Convertible Debentures due 2052 which are currently treated as equity in accordance
with EIC-71, Financial Instruments that may be Settled at the Issuers Option in Cash or its own
Equity Instruments. Consistent with this change, it will be necessary to record interest expense
in lieu of accretion charges with respect to these convertible debt securities. The impact on our
balance sheet as at December 31, 2004 will be an increase in long-term debt of $210 million, an
increase in deferred income and mining taxes of $11 million, a decrease in convertible debt
classified as equity of $201 million, an increase in deferred charges of $7 million and a reduction
in retained earnings of $13 million. In addition, as these revisions will result in the
retroactive restatement of our interest expense, there will also be an increase in the amount of
interest capitalized to date in respect of our development projects in the amount of $7 million. For a complete discussion of current and future accounting changes as they relate to our
United States GAAP reporting, reference is made to note 24 to our 2004 consolidated financial
statements. 
 Outlook We continue to pursue our goal of being the worlds most profitable nickel producer
through our three-part strategy of maintaining low-cost operations focused on high-margin
production, pursuing profitable growth and enhancing our strong global marketing position,
including the development and sale of value-added products. Our two major development projects, Voiseys Bay and Goro, are currently expected to have a
significant effect on our future results of operations, financial condition and cash flow from
operations. 
 Operations Our 2005 nickel production is currently expected to be in the range of 222,000 to 227,000
tonnes (490 to 500 million pounds), down from the 236,817 tonnes (522 million pounds) level in
2004. We did not have a scheduled maintenance shutdown at our Ontario operations in 2004, but
consistent with our current plan to have such a shutdown at these operations every eighteen months,
we are planning a one-month maintenance shutdown in the second quarter of 2005. Such a shutdown
would be expected to reduce our annual nickel production by about 15 million pounds, our annual
copper production by 25 million pounds and our annual PGMs production by about 35,000 troy ounces
from levels at these operations if there were no shutdown. An annual four-week shutdown is also
planned at our Manitoba operations in 2005 and will also include a 10-week furnace rebuild. We
expect our purchases of nickel intermediates to increase by 13 per cent from 2004 levels to
approximately 35,380 tonnes (78 million pounds) in 2005. This external feed source is expected to
represent the source of about 16 per cent of planned 2005 finished nickel production, up from
31,300 tonnes (69 million pounds) or 13 per cent in 2004. We continue to use purchased nickel
intermediates to increase the processing capacity utilization of our Ontario and Manitoba
operations, as discussed under Risks and Uncertainties  Other Risks and Uncertainties above, and
to maintain finished nickel production at the Manitoba operations at or near its 45,000 tonne
annual capacity. While such use is profitable, it does increase our costs, particularly at higher
nickel prices since the cost of purchased nickel intermediates is based on prevailing LME cash
nickel or other benchmark prices. With the expected significant volume of intermediate nickel
product to be produced from Voiseys Bay in 2006, these concentrates will replace such concentrate
and are currently expected to enable our Manitoba operations to maintain or exceed its current
annual production capacity of 45,000 metric tonnes over the 2006  2011 period. Copper production
for 2005 is currently expected to be approximately 113,400 tonnes (250 million pounds) in 2005,
down nine per cent from 124,456 tonnes (274 million pounds) in 2004. Total production of PGMs is
expected to decrease to 370,000 troy ounces in 2005 from the 2004 level of 422,000 troy ounces. As discussed under Labour Relations above, the current collective agreement covering
our Manitoba unionized workforce expires in September 2005. If a new agreement cannot be
successfully negotiated without a labour disruption, such an event could have a material adverse
effect on our production for the fourth quarter of 2005 and our results of operations, financial
condition and liquidity. 
 2005 Planned Capital Expenditures Our 2005 capital expenditures are currently expected to total $1,450 million before any
contributions that may be made by new shareholders in Goro Nickel S.A. and receipt of certain
government assistance under programs relating to our development projects. 127




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This estimate includes, as discussed above, approximately $410 million for the Voiseys Bay
project, including capitalized interest and $50 million to be spent at the Ontario and Manitoba
operations for facilities to handle Voiseys Bay concentrate, approximately $560 million, including
capitalized interest, for the Goro project, $70 million for the program to increase production at
PT Inco, approximately $320 million in sustaining capital expenditures for existing operations and
$90 million for environmental measures. Total depreciation, depletion and amortization expenses
are currently projected to be $275 million in 2005, including an estimated $29 million in respect
of the Voiseys Bay project given that it is expected to commence operation in the later part of
2005. Depreciation, depletion and amortization expenses for the Voiseys Bay operations are
currently expected to increase from the $29 million level for 2005 to about $270 million for 2006,
reflecting depreciation of the facilities and equipment, depletion and amortization of the
acquisition cost of the Voiseys Bay deposits for the full year. 
 Nickel Market Conditions The stainless steel industry, the principal end-use market for nickel, has been making
significant investments to increase production capacity to meet continued demand growth. Demand
for stainless steel is currently expected to remain strong over at least the next few years based
upon the expected strong growth in world demand, in particular continued strong demand growth in
China and other parts of Asia. Strong nickel demand, driven by China and such non-stainless steel
uses as the aerospace market, coupled with low inventories, tighter scrap conditions and limited
production growth, are currently expected to result in relatively high and volatile nickel prices
in 2005. With most nickel producers having operated at or near capacity in 2004 and taking into account
that there currently exists, we believe, no shutdown capacity available to be restarted and with
the latest round of expansions to existing production capacity having been completed in 2004, we
currently estimate that, as discussed above, there will be an insufficient amount of additional
nickel supply prior to at least 2006 to meet the expected growth in underlying nickel demand. As discussed under Labour Relations above, we cannot predict whether we will be able to
enter into a new collective agreement covering our Manitoba operations without a labour disruption
when the current agreement expires in September 2005. Nickel demand in 2005 is currently anticipated to be relatively strong for several reasons.
First, the production of nickel-containing stainless steel in China is expected to continue to
increase due to the ramp-up in production of several large stainless production facilities in that
country. Nickel demand growth in China is expected to be supported by the absence of large primary
nickel and secondary stainless steel scrap inventories, which we believe adversely impacted primary
nickel demand growth in China in 2004. For 2005, the currently projected strong nickel demand in
China is expected to be complemented by the continued economic strength in other Asia regions as
well as in the United States. Second, the recovery of the aerospace industry and strength in the
oil and gas market are expected to generate an increase in demand for nickel-based alloys and, in
turn, nickel. Third, reported nickel inventories, both producer and LME, are at very low levels
relative to prior nickel cycles. We currently estimate that inventory levels at December 31, 2004
represented approximately four weeks of demand, which is considered very low. Fourth, the
availability of nickel-containing stainless steel scrap, as an alternative source of nickel for the
stainless steel industry, is not expected to keep pace with demand growth in 2005. This expected
supply-demand imbalance is due to the strong growth experienced in the usage and liquidation of
inventories of such scrap in 2004, which we believe will not be sustainable. 
 Non-GAAP Financial Measure We have referred to nickel unit cash cost of sales before and after by-product credits
because we understand that certain investors use this information to assess our performance and
also determine our ability to generate cash flow for use in investing activities. The inclusion of
these two unit cost measurements, nickel unit cash cost of sales before and after by-product
credits, enables investors to better understand our year-to-year changes in production costs using
metrics that reflect our key ongoing cash production costs which, in turn, affect our profitability
and cash flows. These measurements capture all of the important components of our production and
related costs. The reason for providing the nickel unit cash cost of sales on the basis of before
as well as after by-product credits is to allow investors to see the impact on these metrics of
changes in copper, cobalt and precious metals contributions which have historically largely been
driven by the prices for these metals. In addition, as discussed above, management utilizes these
metrics as an important management tool to monitor cost performance of each of our key operations
relative to planned and prior period results. These measurements are intended to provide
additional information and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with Canadian GAAP. The following table provides for the periods indicated a reconciliation between nickel unit
cash cost of sales before and after by-product credits, two key measurements we use to monitor our
cost performance, and Canadian GAAP cost of sales: 128




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Reconciliation of Nickel Unit Cash Cost of Sales Before and After By-Product Credits to Canadian GAAP Cost of Sales ($ millions except pound and per pound data)
    
    2004
    
    
    2003
    
    
    2002Cost of
sales and other operating expenses, excluding depreciation
and depletion
    
    $
    2,348
    
    
    $
    1,735
    
    
    $
    1,378By-product costs
    
    
    (572
    )
    
    
    (383
    )
    
    
    (415
    )Purchased finished nickel
    
    
    (234
    )
    
    
    (279
    )
    
    
    (130
    )Delivery expense
    
    
    (33
    )
    
    
    (25
    )
    
    
    (24
    )Other businesses cost of sales
    
    
    (38
    )
    
    
    (25
    )
    
    
    (22
    )Strike expense, excluding depreciation
    
    
    
    
    
    
    (88
    )
    
    
    Non-cash items1
    
    
    (28
    )
    
    
    (24
    )
    
    
    (17
    )Remediation, demolition and other related expenses
    
    
    (30
    )
    
    
    (55
    )
    
    
    (23
    )Adjustments associated with affiliate transactions
    
    
    (54
    )
    
    
    (28
    )
    
    
    Other
    
    
    (11
    )
    
    
    (8
    )
    
    
    (7
    )Nickel cash cost of sales before by-product credits 2
    
    
    1,348
    
    
    
    820
    
    
    
    740By-product net sales
    
    
    (719
    )
    
    
    (330
    )
    
    
    (476
    )By-product costs
    
    
    572
    
    
    
    383
    
    
    
    415Nickel cash cost of sales after by-product credits 2
    
    $
    1,201
    
    
    $
    873
    
    
    $
    679Inco-source nickel deliveries (millions of pounds)
    
    
    518
    
    
    
    406
    
    
    
    468Nickel unit cash cost of sales before by-product credits per pound
    
    $
    2.60
    
    
    $
    2.02
    
    
    $
    1.58Nickel unit cash cost of sales before by-product credits per tonne
    
    $
    5,732
    
    
    $
    4,453
    
    
    $
    3,483Nickel unit cash cost of sales after by-product credits per pound
    
    $
    2.32
    
    
    $
    2.15
    
    
    $
    1.45Nickel unit cash cost of sales after by-product credits per tonne
    
    $
    5,115
    
    
    $
    4,740
    
    
    $
    3,197
   1
    
    Post-retirement benefits other than pensions.2
    
    Nickel cash cost of sales before and after by-product credits includes
costs for our Inco ore source and purchased nickel intermediates. 
 Other Information Reference is made to Other Information above for certain information on governmental
and other policies and factors affecting our operations and investments by non-Canadians in our
securities. Reference is also made to Quarterly Financial Information below for our quarterly
net sales, net earnings and earnings per share data for 2004 and 2003. 129




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information under Risks and Uncertainties and Sensitivities in Managements
Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this
Report is incorporated herein by reference to such information. 130




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Item 8. Financial Statements and Supplementary Data Managements Report on Internal Control Over Financial Reporting The management of Inco Limited is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control over financial reporting is a
process designed under the supervision and with the participation of our management to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our
consolidated financial statements, for external purposes, in accordance with Canadian generally
accepted accounting principles. As of December 31, 2004, management conducted an assessment of the effectiveness of our internal
control over financial reporting based on the framework established in Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that our internal control over financial
reporting was effective as of December 31, 2004. Our internal control over financial reporting includes policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and
dispositions of assets, provide reasonable assurances that transactions are recorded as necessary
to permit the preparation of our consolidated financial statements in accordance with Canadian
generally accepted accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of management and our Board of Directors, and provide reasonable
assurance regarding the prevention or timely detection of an unauthorized acquisition, use or
disposition of assets that could have a material effect on our consolidated financial statements. Our internal control over financial reporting and managements assessment of the effectiveness of
internal control over financial reporting as of December 31, 2004 have been audited by our
auditors, PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is set forth below. 131




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Auditors Report To the Shareholders of Inco Limited We have audited the accompanying consolidated balance sheets of Inco Limited (the Company) as
at December 31, 2004, 2003 and 2002 and the related consolidated statements of earnings, retained
earnings (deficit) and cash flows for each of the years in the three-year period ended December 31,
2004. In addition, we have audited Schedule VIII  Valuation Accounts and Reserves under Item 8 of
this Report. We have also audited the effectiveness of the Companys internal control over
financial reporting as at December 31, 2004, based on the criteria established in Internal Control
 Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission(COSO) and managements assessment thereof included in Managements Report on Internal
Control Over Financial Reporting, appearing above. The Companys management is responsible for
these financial statements and the financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule, an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal control over financial reporting based on
our audits. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. We conducted our audits of the Companys financial statements in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB). Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. A financial statement audit also includes assessing
the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We conducted our audit of the effectiveness of the
Companys internal control over financial reporting and managements assessment thereof in
accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control and performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as at December 31, 2004, 2003 and 2002 and
the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2004 in accordance with Canadian generally accepted accounting principles. In
addition, in our opinion, Schedule VIII  Valuation Accounts and Reserves presents fairly, in all
material respects, the financial information set forth therein when read in conjunction with the
related consolidated financial statements. Also, in our opinion, managements assessment that the
Company maintained effective internal control over financial reporting as at December 31, 2004 is
fairly stated, in all material respects, based on criteria established in Internal Control 
Integrated Frameworkissued by the COSO. Furthermore, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as at December 31, 2004
based on criteria established in Internal Control  Integrated Frameworkissued by the COSO. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. PRICEWATERHOUSE COOPERS LLP
Chartered Accountants
Toronto, Ontario February 14, 2005 132




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Consolidated Statement of Earnings Year ended December 31
    
    
    
    
    2003
    
    
    2002(in millions of United States dollars except per share amounts)
    
    2004
    
    
    (Restated)
    
    
    (Restated)RevenuesNet sales (Note 20)
    
    $
    4,278
    
    
    $
    2,474
    
    
    $
    2,161Other income, net (Note 6)
    
    
    48
    
    
    
    104
    
    
    
    404,326
    
    
    
    2,578
    
    
    
    2,201Costs and operating expenses (income)Cost of sales and other operating expenses, excluding
depreciation and depletion (Note 3)
    
    
    2,348
    
    
    
    1,735
    
    
    
    1,378Depreciation and depletion (Note 3)
    
    
    248
    
    
    
    227
    
    
    
    242Selling, general and administrative
    
    
    192
    
    
    
    169
    
    
    
    136Research and development
    
    
    29
    
    
    
    27
    
    
    
    17Exploration
    
    
    32
    
    
    
    27
    
    
    
    24Currency translation adjustments
    
    
    85
    
    
    
    177
    
    
    
    5Interest expense
    
    
    24
    
    
    
    44
    
    
    
    50Asset impairment charges (Note 4)
    
    
    201
    
    
    
    
    
    
    
    2,415Goro project suspension costs (Note 5)
    
    
    (1
    )
    
    
    (4
    )
    
    
    253,158
    
    
    
    2,402
    
    
    
    4,292Earnings (loss) before income and mining taxes and minority interest
    
    
    1,168
    
    
    
    176
    
    
    
    (2,091
    )Income and mining taxes (Note 7)
    
    
    430
    
    
    
    (37
    )
    
    
    (636
    )Earnings (loss) before minority interest
    
    
    738
    
    
    
    213
    
    
    
    (1,455
    )Minority interest
    
    
    126
    
    
    
    60
    
    
    
    22Net earnings (loss)
    
    
    612
    
    
    
    153
    
    
    
    (1,477
    )Accretion of convertible debt, net of tax (Note 15)
    
    
    (9
    )
    
    
    (7
    )
    
    
    (4
    )Dividends on preferred shares (Note 16)
    
    
    
    
    
    
    (6
    )
    
    
    (26
    )Premium on redemption of preferred shares (Note 16)
    
    
    
    
    
    

    (15
    )
    
    
    Net earnings (loss) applicable to common shares
    
    $
    603
    
    
    $
    125
    
    
    $
    (1,507
    )Net earnings (loss) per common share (Note 8)Basic
    
    $
    3.22
    
    
    $
    0.68
    
    
    $
    (8.24
    )Diluted
    
    $
    2.99
    
    
    $
    0.66
    
    
    $
    (8.24
    )
 Consolidated Statement of Retained Earnings (Deficit) Year ended December 31
    
    
    
    
    2003
    
    
    2002(in millions of United States dollars)
    
    2004
    
    
    (Restated)
    
    
    (Restated)Retained earnings (deficit) at beginning of year, as previously reported
    
    $
    (206
    )
    
    $
    (335
    )
    
    $
    1,194Change in accounting policies (Note 2)
    
    
    
    
    
    
    4
    
    
    
    (18
    )Retained earnings (deficit) at beginning of year, as restated
    
    
    (206
    )
    
    
    (331
    )
    
    
    1,176Net earnings (loss)
    
    
    612
    
    
    
    153
    
    
    
    (1,477
    )Accretion of convertible debt, net of tax (Note 15)
    
    
    (9
    )
    
    
    (7
    )
    
    
    (4
    )Dividends on preferred shares (Note 16)
    
    
    
    
    
    
    (6
    )
    
    
    (26
    )Premium on redemption of preferred shares (Note 16)
    
    
    
    
    
    
    (15
    )
    
    
    Retained earnings (deficit) at end of year
    
    $
    397
    
    
    $
    (206
    )
    
    $
    (331
    )
 The Notes to Consolidated Financial Statements below are an integral part of these statements. 133




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Consolidated Balance Sheet December 31
    
    
    
    
    2003
    
    
    2002(in millions of United States dollars)
    
    2004
    
    
    (Restated)
    
    
    (Restated)ASSETSCurrent assetsCash and cash equivalents (Note 23)
    
    $
    1,076
    
    
    $
    418
    
    
    $
    1,087Accounts receivable
    
    
    601
    
    
    
    435
    
    
    
    251Inventories (Note 9)
    
    
    834
    
    
    
    746
    
    
    
    576Other
    
    
    63
    
    
    
    112
    
    
    
    73Total current assets
    
    
    2,574
    
    
    
    1,711
    
    
    
    1,987Property, plant and equipment (Note 10)
    
    
    7,580
    
    
    
    7,033
    
    
    
    6,401Deferred charges and other assets (Notes 12 and 21)
    
    
    569
    
    
    
    319
    
    
    
    208Total assets
    
    $
    10,723
    
    
    $
    9,063
    
    
    $
    8,596LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesLong-term debt due within one year (Notes 11 and 21)
    
    $
    107
    
    
    $
    103
    
    
    $
    97Accounts payable
    
    
    331
    
    
    
    253
    
    
    
    338Accrued payrolls and benefits
    
    
    208
    
    
    
    165
    
    
    
    118Other accrued liabilities
    
    
    399
    
    
    
    332
    
    
    
    210Income and mining taxes payable
    
    
    279
    
    
    
    27
    
    
    
    167Total current liabilities
    
    
    1,324

    
    
    
    880
    
    
    
    930Deferred credits and other liabilitiesLong-term debt (Notes 11 and 21)
    
    
    1,551
    
    
    
    1,409
    
    
    
    1,546Deferred income and mining taxes (Note 7)
    
    
    1,879
    
    
    
    1,706
    
    
    
    1,350Post-retirement benefits (Note 12)
    
    
    671
    
    
    
    603
    
    
    
    475Asset retirement obligation (Note 13)
    
    
    171
    
    
    
    141
    
    
    
    119Other deferred credits (Note 14)
    
    
    58
    
    
    
    
    
    
    
    Total liabilities
    
    
    5,654
    
    
    
    4,739
    
    
    
    4,420Minority interest
    
    
    529
    
    
    
    442
    
    
    
    385Commitments and contingencies (Note 22)Shareholders equityConvertible debt (Note 15)
    
    
    619
    
    
    
    606
    
    
    
    238Preferred shares (Note 16)
    
    
    
    
    
    
    
    
    
    
    472Common shareholders equityCommon shares issued and outstanding 188,133,439
(2003  186,915,865, 2002  183,238,351) (Notes 18 and 19)
    
    
    2,891
    
    
    
    2,858
    
    
    
    2,771Warrants (Note 17)
    
    
    62
    
    
    
    62
    
    
    
    62Contributed surplus (Note 19)
    
    
    571
    
    
    
    562
    
    
    
    559Retained earnings (deficit)
    
    
    397
    
    
    
    (206
    )
    
    
    (331
    )3,921
    
    
    
    3,276
    
    
    
    3,061Contingently issuable equity (Notes 16 and 18)
    
    
    
    
    
    
    
    
    
    
    20Total shareholders equity
    
    
    4,540
    
    
    
    3,882
    
    
    
    3,791Total liabilities and shareholders equity
    
    $
    10,723
    
    
    $
    9,063
    
    
    $
    8,596
 The Notes to Consolidated Financial Statements below are an integral part of these statements. 134




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Consolidated Statement of Cash Flows Year ended December 31
    
    
    
    
    2003
    
    
    2002(in millions of United States dollars)
    
    2004
    
    
    (Restated)
    
    
    (Restated)Operating activitiesEarnings (loss) before minority interest
    
    $
    738
    
    
    $
    213
    
    
    $
    (1,455
    )Charges (credits) not affecting cashDepreciation and depletion
    
    
    248
    
    
    
    227
    
    
    
    242Deferred income and mining taxes
    
    
    68
    
    
    
    38
    
    
    
    (742
    )Asset impairment charges (Note 4)
    
    
    201
    
    
    
    
    
    
    
    2,415Other
    
    
    102
    
    
    
    81
    
    
    
    41Contributions (greater than) less than post-retirement benefits expense
    
    
    (140
    )
    
    
    (23
    )
    
    
    5Decrease (increase) in non-cash working capital related to operationsAccounts receivable
    
    
    (166
    )
    
    
    (184
    )
    
    
    (8
    )Inventories
    
    
    (88
    )
    
    
    (170
    )
    
    
    (77
    )Accounts payable and accrued liabilities
    
    
    126
    
    
    
    124
    
    
    
    98Income and mining taxes payable
    
    
    249
    
    
    
    (140
    )
    
    
    106Other
    
    
    55
    
    
    
    (35
    )
    
    
    (26
    )Net cash provided by operating activities
    
    
    1,393
    
    
    
    131
    
    
    
    599Investing activitiesCapital expenditures
    
    
    (876
    )
    
    
    (591
    )
    
    
    (600
    )Other
    
    
    (5
    )
    
    
    26
    
    
    
    (9
    )Net cash used for investing activities
    
    
    (881
    )
    
    
    (565
    )
    
    
    (609
    )Financing activitiesLong-term borrowings
    
    
    205
    
    
    
    314
    
    
    
    884French government-sponsored Girardin Act financing (Note 14)
    
    
    41
    
    
    
    
    
    
    
    Repayments of long-term debt
    
    
    (100
    )
    
    
    (574
    )
    
    
    (81
    )Convertible debt issued
    
    
    
    
    
    
    470
    
    
    
    Preferred shares redeemed
    
    
    
    
    
    
    (487
    )
    
    
    Common shares issued
    
    
    30
    
    
    
    60
    
    
    
    15Preferred dividends paid
    
    
    
    
    
    
    (6
    )
    
    
    (26
    )Dividends paid to minority interest
    
    
    (20
    )
    
    
    (7
    )
    
    
    (1
    )Other
    
    
    (10
    )
    
    
    (5
    )
    
    
    Net cash provided by (used for) financing activities
    
    
    146
    
    
    
    (235
    )
    
    
    791Net increase (decrease) in cash and cash equivalents
    
    
    658
    
    
    
    (669
    )
    
    
    781Cash and cash equivalents at beginning of year
    
    
    418
    
    
    
    1,087
    
    
    
    306Cash and cash equivalents at end of year (Note 23)
    
    $
    1,076
    
    
    $
    418
    
    
    $
    1,087
 The Notes to Consolidated Financial Statements below are an integral part of these statements. 135




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Notes to Consolidated Financial Statements (Tabular amounts in millions of United States dollars except number of shares and per share
amounts) Note 1. Summary of significant accounting policies The consolidated financial statements of Inco Limited (Inco) and its subsidiaries (referred
to as we, us and our) are prepared in accordance with generally accepted accounting
principles (GAAP) in Canada, consistently applied which, in our case, conform in all material
respects with GAAP in the United States, except as explained in Note 24. Principles of consolidation The financial statements of entities which are controlled by Inco either directly or
indirectly, through wholly-owned subsidiaries, are consolidated. Control is established by our
ability to determine strategic, operating, investing and financing policies without the
co-operation of others. The criteria we use include an analysis of our level of ownership, voting
rights and our level of representation on the board of directors. We evaluate these criteria in
terms of determining whether the existence of one of the criteria alone (such as a majority
ownership of all voting securities), or a combination of the criteria when taken together, would
result in having control, or the ability to exercise control, of the management, business focus or
strategy and/or critical policies of the particular entity. The financial statements also include
the financial statements of entities that are considered variable interest entities (VIEs) for
which we are the primary beneficiary. The primary beneficiary is the variable interest holder
obligated to absorb a majority of the risk of loss from the VIEs activities, or is entitled to
receive the majority of the VIEs residual returns, or both. Entities which are not controlled and
for which our ownership in all voting securities is greater than 20 per cent and we are able to
exercise significant influence are accounted for using the equity method and are included in
deferred charges and other assets. We have no entities for which we have used the equity method
and own less than 20 per cent of all voting securities. We have no entities for which we own
greater than 50 per cent of all voting securities but do not consolidate. We do not have
subsidiaries or joint ventures for which we use the proportionate consolidation method.
Investments in other entities are accounted for using the cost method. Estimates Financial statements prepared in accordance with Canadian GAAP require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Translation of consolidated financial statements into United States dollars These consolidated financial statements are expressed in United States dollars. The United
States dollar is our functional currency. As our operations are considered integrated for
accounting purposes, we use the temporal method of translation. Monetary assets and liabilities
are translated into United States dollars using year-end rates of exchange. All other assets and
liabilities are translated at applicable historical rates of exchange. Revenues, expenses and
certain costs are translated at monthly average exchange rates except for inventoried costs,
depreciation and depletion which are translated at historical rates. Realized exchange gains and
losses and currency translation adjustments are included in earnings. Cash and cash equivalents Cash and cash equivalents comprise cash, time deposits and other interest bearing instruments
with original maturity dates of less than three months. Inventories Inventories consist of finished metal products, work in process and operating supplies.
Inventories are stated at the lower of cost and estimated net realizable value. The point in our production cycle that costs related to mine and other property, plant and
equipment begin to be capitalized as a cost of inventory is at the mine head. In-process includes
inventory at all stages in the production process. Broken ore in our mines is not recognized as
inventory until delivered to the mine head or temporary storage areas for blending. Cost includes
all direct costs 136




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incurred through to the applicable stage of production, including direct labour and materials,
depreciation and depletion as well as an allocated portion of overheads. Costs are allocated based
on contained metal. The costing of metals produced at our Ontario operations is primarily to establish values for
metals in inventory and cost of sales. Copper and nickel are treated as co-products and share
expenses pro rata based on pounds of metal produced unless a plant is specifically used for the
upgrading of only one metal or the other. Common costs (costs that are not separately identifiable
to one metal) incurred by nickel and copper mined are apportioned between the metals on the basis
of pounds of metal produced through the common mine and mill processes. Once expenditures are
required to further finish a particular metal, all such expenditures are assigned to that metal.
The remaining metals (cobalt and precious metals) are by-products and incur expenses only when some
specific steps are taken towards their recovery. Co-product costing for copper is used because of
the significant quantities of copper contained in the ores at our Ontario operations. We do not have significant quantities of stockpiled ore on hand due to the integrated nature
of our operations. In addition, we do not use leach pads as a processing method at any of our
operations. Period costs such as shutdown expenses, standby costs, property write-offs, costs of
delivering the product to the end customer, including freight and sales administration, are not
allocated to inventory but charged directly to cost of sales and other operating expenses. Property, plant and equipment Property, plant and equipment are stated at cost. Such cost, in the case of mines, mineral
rights and undeveloped properties, represents related acquisition and development expenditures.
Costs are capitalized for an undeveloped property when it is probable that such costs will be
recovered from the exploitation of the property. Financing costs, including interest, are
capitalized when they arise from indebtedness incurred to finance the development, construction or
expansion of significant mineral properties and facilities. Certain currency translation gains and
losses have been capitalized in respect of the Voiseys Bay project as the project is in the
development phase. Capitalization ceases when the property is substantially complete and ready for
use. Development costs are charged as an expense in the period incurred unless we believe a
development project meets generally accepted criteria for deferral and amortization. Research and development costs Research costs are expensed in the period in which they are incurred. Development costs are
deferred where the product or process is clearly defined, the technical feasibility has been
established and we are committed to, and have the resources to, complete the project. Asset impairment When the net carrying value of an item or group of items of property, plant and equipment,
less its related provision for asset retirement obligations and deferred income and mining taxes,
exceeds the estimated undiscounted future net cash flows (which includes payments required to
meet asset retirement obligations) together with its residual value, the excess of the carrying
value over the fair value is charged to earnings. Evaluation of the future cash flows from major
development projects such as the Voiseys Bay and Goro projects entails a number of assumptions
regarding project scope, the timing, receipt and terms of regulatory approvals, estimates of
future metals prices, estimates of the ultimate size of the deposits, ore grades and
recoverability, timing of commercial production, commercial viability of new technological
processes, production volumes, operating and capital costs, and foreign currency exchange rates.
In estimating future net cash flows, assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of cash flows from other asset groups taking
into consideration movements of intermediate products to ensure the utilization of available
capacity across our operations. Generally, all assets at a particular operation are used
together to generate cash flow. Estimates of future cash flows are subject to risks and
uncertainties. We periodically review our equity method investments to determine whether a decline in fair
value below the carrying amount is other than temporary. 137




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Revenue recognition Our primary products are nickel and copper. Most of our nickel is sold as refined nickel and
our copper is predominantly sold as copper cathode. We also sell precious metals, cobalt and other
by-products. Sales of all commodities are recognized as revenue when title has passed under the
terms of the relevant contracts or sale, which is generally when shipped. Net sales include
revenues from the sale of all metals produced by us, including metals which we refer to as
by-products as well as sulphuric acid and liquid sulphur. For most of our sales, the price is fixed at the time revenue is recognized, and is based on
quoted commodity prices on recognized exchanges. At the end of each period, a portion of our
revenues are provisionally priced. For provisionally priced sales, final settlement is generally
based on the average London Metal Exchange (LME) cash nickel price for a specified future period
generally after the month of arrival at the customers facility which is within 90 days of sale.
As such any proceeds received represent provisional sales proceeds and not final sales proceeds.
At December 31, 2004, we had provisionally priced sales of 39 million pounds of nickel. Exploration Exploration properties that contain estimated proven and probable ore/mineral reserves, but
for which a development decision has not yet been taken, are subject to periodic review for
impairment in accordance with our accounting policy when events or changes in circumstances
indicate the related carrying value may not be recoverable. Exploration expenditures are expensed as incurred except in areas currently under development,
where production is probable, or in areas under feasibility study, where there is a reasonable
expectation to convert existing estimated mineral resources to estimated ore/mineral reserves and
add additional mineral resources with additional drilling and evaluations in areas near existing
ore/mineral reserves, and existing or planned production facilities, in which case they are
capitalized and amortized using the units-of-production method. Depreciation and depletion Property, plant and equipment is generally depreciated on a straight line basis over the
following estimated economic lives: Mine and mobile equipment
    
    3 to 10 yearsProcessing facilities
    
    15 to 20 yearsSmelter equipment
    
    15 to 20 yearsRefinery equipment
    
    5 to 20 yearsPower generation facilities and equipment
    
    10 to 50 yearsFurniture and fixtures
    
    10 years
 The estimated economic life is assessed on an annual basis, taking into account the state of
the equipment, technological changes and the related facilities or the estimated proven and
probable ore/mineral reserves where the equipment is located. Some equipment has an estimated
economic life in excess of 20 years, and is being amortized on a 5 per cent declining balance
basis. When an assessment is made that the remaining life of that equipment is less than 20 years,
the depreciation method is switched to straight line. Depreciation starts when an asset is ready
for use. Depletion of deferred mine development costs is calculated on a units-of-production basis over
the estimated proven and probable ore/mineral reserves which relate to the particular category of
development, either life of mine plan or area-specific. No future development costs are taken into
account in calculating the depletion charge. Life of mine plan development comprises capital expenditures that will be utilized in the
extraction of all the estimated proven and probable ore/mineral reserves in the current detailed
mine plan. These expenditures are predominantly incurred up front and in advance of any ore
extraction or in advance of major expansions. The types of development included in this category
include ore haulage shafts, initial decline, ore passes, ventilation, and chutes and underground
ore crusher cavities and are intended to be used for the extraction of all ore within the current
mine plan. These costs are depleted on a units-of-production basis over the total estimated proven
and probable ore/mineral reserves. Area-specific development costs, which are depleted over estimated proven and probable
ore/mineral reserves for which no further capital is required, consist of capital expenditures to
provide access to various areas within the mine to allow the extraction of 138




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ore to commence. The types of development costs that are within this category include: access
and perimeter drives, ventilation drives and rises, and progressive declining subsequent to initial
contact with the orebody. Annual deferred mine development costs incurred to access specific ore
blocks or areas are depleted on a units-of-production basis over the estimated proven and probable
ore/mineral reserves that can be currently accessed in those areas without future capital
development costs being incurred. Ongoing mine development costs that provide access to ore for less than two years production
are expensed as incurred. Asset retirement obligations The accounting for asset retirement obligations encompasses the accounting for legal
obligations associated with the retirement of a tangible long-lived asset that results from the
acquisition, construction or development and/or the normal operation of a long-lived asset. The
retirement of a long-lived asset is its other than temporary removal from service, including its
sale, abandonment, recycling or disposal in some other manner. We recognize asset retirement obligations as liabilities when a legal obligation with respect
to the retirement of an asset is incurred, with the initial measurement of the obligation at fair
value. These obligations are accreted to full value over time through charges to income. In
addition, an asset retirement cost equivalent to the liabilities is capitalized as part of the
related assets carrying value and is subsequently depreciated or depleted over the assets useful
life. A liability for an asset retirement obligation is incurred over more than one reporting
period when the events that create the obligation occur over more than one reporting period. For
example, if a facility is permanently closed but the closure plan is developed over more than one
reporting period, the cost of the closure of the facility is incurred over the reporting periods
when the closure plan is finalized. Any incremental liability incurred in a subsequent reporting
period is considered to be an additional layer of the original liability. Each layer is initially
measured at fair value. As required, a separate layer shall be measured, recognized and accounted
for prospectively. Our asset retirement obligations consist primarily of costs associated with
mine reclamation and closure activities. Our operations have been, and may in the future be, affected from time to time in varying
degrees by changes in environmental laws and regulations, including those for asset retirement
obligations. Both the likelihood of future changes in laws and regulations and their overall
effect upon us vary greatly from country to country and are not predictable. Our policy is to meet
or, if possible, surpass environmental standards set by relevant legislation, by the application of
technically proven and economically feasible measures. For environmental issues that may not involve the retirement of an asset, where we are a
responsible party and it is determined that a liability exists, and amounts can be quantified, we
accrue for the estimated liability. In determining whether a liability exists in respect of such
environmental issues, we apply the criteria for liability recognition under applicable accounting
standards Income and mining taxes Income and mining taxes comprise the provision (relief) for taxes actually paid or payable
(received or receivable) and deferred taxes. Deferred income and mining taxes are computed using
the asset and liability method whereby deferred income and mining tax assets and liabilities are
recognized for the expected future tax consequences attributable to temporary differences between
the tax bases of assets and liabilities and their reported amounts in the financial statements.
Deferred income and mining tax assets and liabilities are computed using current foreign currency
exchange rates and using income tax rates in effect when the temporary differences are expected to
reverse. The effect on deferred income and mining tax assets and liabilities of a change in tax
rates is recognized in earnings in the period of substantive enactment. The provision or relief
for deferred income and mining taxes is based on the changes in deferred income and mining tax
assets and liabilities during the period. In estimating deferred income and mining tax assets, a
valuation allowance is determined to reduce the future income tax assets to that amount that it is
more likely than not to be realized. Investment tax credits are accounted for by the cost reduction method whereby investment tax
credits related to the acquisition of assets are deferred and recognized in earnings as the related
assets are depreciated, while those related to research and development expenses are included in
earnings. Financial instruments and commodities contracts Forward, option and swap contracts are periodically used to hedge the effect of exchange rate
changes on our future currency requirements. In addition, forward, option and swap contracts are
used to hedge the effect of price changes on a portion of the metals 139




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we sell. Fuel oil swap contracts are used to hedge the effect of price changes in respect of
a portion of our energy requirements in Indonesia. Gains and losses on these contracts are
deferred and recognized as a component of the related transaction. Interest rate swaps are used to
hedge interest rate risk exposure. Amounts receivable or payable related to the swaps are recorded
in interest expense concurrently with the interest expense of the underlying debt. We also
purchase and sell foreign currencies and metals by using forward contracts which have not been
specifically identified as hedges. The values of these contracts are marked to market with
resulting gains and losses included in earnings. Hedge accounted financial instruments are
documented and periodic effectiveness tests are performed. Absent such documentation and testing,
changes in the fair value of financial instruments are realized in earnings. Post-retirement benefits The cost of providing benefits through defined benefit pensions and post-retirement benefits
other than pensions is actuarially determined and recognized in earnings using the projected
benefit method prorated on service. Differences arising from plan amendments are recognized in
earnings over the expected average remaining service life of employees. Differences arising from
changes in assumptions and experience gains and losses are recognized in earnings by amortizing the
excess of the net actuarial gains and losses over 10 per cent of the greater of the post-retirement
benefits obligation and the fair value of plan assets over the expected average remaining service
life of employees. The cost of providing benefits through defined contribution pension plans is
charged to earnings in the period in respect of which contributions become payable. Stock compensation plans Cash received from employees upon exercise of options to purchase Common Shares is credited to
then issued and outstanding Common Shares. In respect of Common Share appreciation rights,
compensation expense is determined and accrued over the vesting period of the options based on the
excess of the quoted market value of the respective shares over the exercise price. In respect of
our other stock options, we recognize as an expense the cost over the vesting period based on the
estimated fair value of the stock options. The fair value of each stock option granted is
estimated on the date of the grant using an option-pricing model. Net earnings (loss) per Common Share Basic earnings (loss) per Common Share is computed by dividing net earnings (loss) applicable
to Common Shares by the weighted-average number of Common Shares issued and outstanding for the
relevant period. Diluted earnings (loss) per Common Share is computed by dividing net earnings
applicable to Common Shares, as adjusted for the effects of dilutive convertible securities, by the
sum of the weighted-average number of Common Shares issued and outstanding and all additional
Common Shares that would have been outstanding if potentially dilutive Common Shares had been
issued. For convertible securities we use the if-converted method whereas the treasury stock
method is used for stock options and warrants. Note 2. Changes in accounting policies (a) Variable interest entities In June 2003, the Canadian Institute of Chartered Accountants (CICA) issued Accounting
Guideline 15, Consolidation of Variable Interest Entities, (AcG-15). AcG-15 provides a new
framework for identifying variable interest entities (VIEs) and determining when a company should
include the assets, liabilities, non-controlling interests and results of operations of a VIE in
its consolidated financial statements. In general, a VIE is a corporation, partnership, limited liability corporation or any other
legal structure used to conduct activities or hold assets that either (i) has insufficient equity
to carry out its principal activities without additional subordinated financial support, (ii) has a
group of equity owners that do not have sufficient rights or the ability to make significant
decisions about the VIEs activities, or (iii) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns generated by its operations. AcG-15 requires a VIE to be consolidated if a party with an ownership, contractual or other
financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of
risk of loss from the VIEs activities, or is entitled to receive a majority of the VIEs residual
returns (if no party absorbs the majority of the VIEs losses), or both. A variable interest
holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the
primary beneficiary must initially record all of the VIEs assets, 140




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liabilities and non-controlling interests and subsequently account for the VIE as if it were
consolidated based on majority voting interest. We early adopted this accounting guideline in 2004 as a result of the French
government-sponsored Girardin Act financing arrangements for our Goro project which were entered
into on December 30, 2004. The effect of adopting the provisions of AcG-15 is to increase both
total assets and total liabilities by approximately $41 million as of December 31, 2004. Reference
is made to Note 14 for further information. (b) Depreciation and depletion expense Effective January 1, 2004, on a retroactive basis, we changed the method in which we calculate
depreciation and depletion expense. Under the previous method, we depleted mine development costs
on a composite basis. Total historical capitalized costs and estimated future development costs
relating to our developed and undeveloped estimated proven and probable ore/mineral reserves were
depleted using the units-of-production method based on total developed and undeveloped estimated
proven and probable ore/mineral reserves. Under the new method, depletion of the deferred mine
development costs is calculated on a units-of-production basis over the estimated proven and
probable ore/mineral reserves which relate to the particular category of development, either life
of mine plan or area-specific. No future development costs are taken into account in calculating
the depletion charge. In addition, the depreciation method covering certain other assets of our 61
per cent owned subsidiary, PT International Nickel Indonesia Tbk (PT Inco), has been changed to a
straight line basis to conform its depreciation method used to the depreciation methods used for
similar assets in other company locations. The impact of this change on 2003 depreciation and depletion expense was a reduction of $38
million (2002 - $13 million). (c) Generally accepted accounting principles Effective January 1, 2004, we adopted CICA Section 1100, Generally Accepted Accounting
Principles. CICA 1100 describes what constitutes Canadian GAAP and its sources. Adoption of this
standard did not have a significant impact on our results of operations or financial condition for
2004. (d) Hedging Relationships Effective January 1, 2004, we adopted Accounting Guideline 13, Hedging Relationshipswhich
provides guidance concerning documentation and effectiveness testing for derivative contracts.
Adoption of this guideline did not have a significant impact on our results of operations or
financial condition for 2004. (e) Stock-based compensation Effective January 1, 2003, we changed our accounting for stock options from the intrinsic
value method to one that recognizes as an expense the cost of stock-based compensation based on the
estimated fair value of new stock options granted to employees in 2003 and in future years. The
fair value of each stock option granted is estimated on the date of the grant using an
option-pricing model. As a result of this change in accounting policy, which was applied
prospectively, an expense of $3 million was recorded in 2003, to reflect the fair value of stock
options granted to employees in 2003. (f) Impairment of long-lived assets Effective January 1, 2003, we adopted CICA Section 3063, Impairment of Long-Lived Assets.
This section establishes standards for the recognition, measurement and disclosure of the
impairment of long-lived assets that are held for use. An impairment loss would be recognized if
the carrying amount of a long-lived asset was not recoverable from its undiscounted cash flows and
would be measured as the difference between the carrying amount and the fair value of the asset.
The initial adoption of the new standard had no impact on our results of operations or financial
condition. 141




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(g) Asset retirement obligations Effective January 1, 2003, we adopted CICA Section 3110, Asset Retirement Obligations. This
standard significantly changed the method of accounting for asset retirement obligation costs.
Under this new standard, asset retirement obligations are recognized when incurred and recorded as
liabilities at fair value. The liability is accreted over time through periodic charges to
earnings. In addition, the asset retirement cost is capitalized as part of the assets carrying
value and depreciated or depleted over the assets useful life. This change in accounting policy
was applied retroactively and, accordingly, the consolidated financial statements of prior periods
were restated. Note 3. Strike expenses A strike of the unionized workforce at our Ontario operations began on June 1, 2003 and a new
collective agreement ending the strike was entered into near the end of August 2003. Strike
expenses are those ongoing costs, such as salaries and certain employment benefits, depreciation,
property taxes, utilities and maintenance incurred during the strike period which would normally be
treated as production costs and charged to inventory but, in the absence of production, have been
expensed because we were not achieving commercial production at the related facilities over the
period of the strike. During the course of this 13-week strike, we incurred strike expenses in the
amount of $107 million. Included in these expenses was depreciation expense of $19 million. The
balance of the strike expenses was included in cost of sales and other operating expenses. Note 4. Asset impairment charges On May 25, 2004 we announced the preliminary findings reached to that date as part of the
second phase, or Phase 2, of the comprehensive review of our approximately 85 per cent owned Goro
nickel-cobalt project in New Caledonia. We also announced that the principal changes in the
planned Goro project configuration resulting from such findings as part of Phase 2 of our review,
moving from indirect to direct heating of ore feed and other changes intended to reduce the capital
cost estimate and enhance the operating efficiency of the planned process plant and the process to
be used itself to recover nickel and cobalt, would result in certain assets being written off in
the second quarter of 2004. Following our review of the affected assets, we recorded a non-cash
charge of $201 million. The affected assets are primarily comprised of engineering and related
work associated with the original project configuration and equipment purchased for the indirect
heating of ore feed which no longer have future use to the Goro project or otherwise. On June 11, 2002, we announced that we would be undertaking a review of the net carrying value
of our Voiseys Bay project in view of the statement of principles entered into with the Government
of the Province of Newfoundland and Labrador on that date and other arrangements with key
stakeholders that would enable the development of that project to proceed. We had noted on a
number of occasions in our public filings and other documents that such events, if and when they
were to occur, might require a significant reduction in the carrying value of the Voiseys Bay
project and in the related deferred income and mining tax liability and in shareholders equity.
This review, which was completed in July 2002, included an analysis of the key assumptions which we
utilized in evaluating this net carrying value on a quarter-to-quarter basis relating to a number
of important factors, including our best assessment of the expected cash flows from the project,
how the development of Voiseys Bay, taking into account the agreements which have been reached,
fits within our overall long-term development plans and updated mining and other cost assumptions.
As a result of this review, we recorded a non-cash charge of $1,552 million, net of deferred income
and mining taxes of $770 million, in 2002. In addition, in 2002, we recorded a non-cash charge of $74 million, net of income and mining
taxes of $19 million, to reduce the carrying values of certain plant, equipment and other assets to
their estimated net recoverable amounts based on an evaluation of their recoverability. The
principal component of this charge related to capitalized exploration and development costs of the
Victor Deep exploration project at our Ontario operations that, as a result of the development of
the deposits covered by our Voiseys Bay projects would probably not be put into production. The
balance of this charge consisted primarily of reductions to certain redundant plant, equipment and
non-core assets as well as an additional provision for losses relating to certain receivables and
other assets arising from our commercial relationships with one of our principal customers that had
filed for bankruptcy protection in late March 2002. Note 5. Goro project suspension costs In early September 2002, the Goro project experienced temporary labour disruptions by
personnel associated with certain project construction subcontractors. As a result of these
disruptions, a decision was made to curtail certain activities at the projects site to enable us,
contractors, subcontractors and other interested parties to develop procedures to avoid future
disruptions. Over the 142




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September  November 2002 period, a number of procedures were put in place as part of a phased
resumption of certain of the project activities that had been curtailed. During this period, we
also initiated an update of the status of certain key aspects of the project, including the
necessary permitting, capital cost estimate, project schedule and organization. Work on certain
critical parts of the project, including engineering, continued during this update process. On December 5, 2002, we announced that we would be undertaking a comprehensive review of the
Goro project. This action had been based upon information from the projects principal firms
providing project engineering, procurement and construction management services that we had
received that, if confirmed, would indicate an increase in the capital cost for the project in the
range of 30 to 45 per cent above the then current capital cost estimate of $1,450 million. As a
result of the temporary suspension of certain development activities and other actions which had
been taken by year-end 2002 during this review process, we recorded a pre-tax charge of $25 million
in the fourth quarter of 2002. This charge comprised $62 million relating to the cancellation or
termination of certain outstanding contractual obligations, to accrue for demobilization costs and
to reduce the carrying value of certain assets relating to the project, partially offset by
currency hedging gains of $37 million on certain forward currency contracts. These contracts,
which had been entered into to reduce exposure to exchange rate changes associated with certain
planned project expenditures to be incurred in certain currencies, were closed out in early January
2003 since they no longer matched the timing of such expenditures due to their expected deferral as
a result of the review being undertaken. The close out of these contracts resulted in a further
gain of $11 million during the first quarter of 2003 which was recorded in Other Income. In 2003, additional contracts became ineffective which resulted in a further gain of $21
million. These gains were partially offset by expenses of $17 million incurred for the on-going
care and custody costs associated with the construction site while the project was under
suspension. In 2004, we sold certain assets, which we acquired as a result of the temporary suspension of
certain development activities in late 2002, realizing a gain of $7 million. We also realized a
gain of $9 million as a result of additional forward currency contracts becoming ineffective.
These gains were partially offset by expenses of $15 million incurred for the ongoing care and
custody costs associated with the construction site while the project was under suspension. On
October 19, 2004, the decision was made to proceed with the Goro project. Note 6. Other income, net Other income, net is comprised of the following: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Interest and dividend income
    
    $
    13
    
    
    $
    16
    
    
    $
    13Earnings from affiliates accounted for using equity method
    
    
    5
    
    
    
    2
    
    
    
    Gains from sales of securities and other assets
    
    
    9
    
    
    
    59
    
    
    
    5Gains (losses) from derivative positions in metals
    
    
    (4
    )
    
    
    12
    
    
    
    Interest from a tax refund
    
    
    
    
    
    
    7
    
    
    
    14Gain from closure of derivative foreign currency contracts
    
    
    10
    
    
    
    11
    
    
    
    Loss on redemption of securities
    
    
    
    
    
    
    (2
    )
    
    
    Other, net
    
    
    15
    
    
    
    (1
    )
    
    
    8Other income, net
    
    $
    48
    
    
    $
    104
    
    
    $
    40
 In 2004, gains in the amount of $10 million were realized on certain foreign currency
derivative contracts entered into in anticipation of the expenditures on the Goro project. Gains
from sales of securities and other assets of $9 million includes a gain of $6 million which was
realized on our sale of a subsidiary operation in Guatemala. In 2003, gains from sales of securities and other assets included a milestone payment received
in the fourth quarter of 2003 under the terms of sale of a non-core exploration property in 1998 in
the amount of $24 million as well as $35 million realized from the sale or transfer of shares and
other interests contributed to or received in conjunction with strategic and other collaborations
relating to our primary metals operations. 143




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Note 7. Income and mining taxes In carrying on our Canadian mining operations, we are subject to both income and mining taxes.
The amount of such taxes will vary depending on the provisions set out by the relevant legislative
authority. Generally, most expenditures incurred by us are deductible in computing income tax,
whereas mining tax legislation, although based on a measure of profitability from carrying on
mining operations, is more restrictive in respect of the deductions permitted in computing income
subject to mining tax. In most jurisdictions deductions for financing expenses, such as interest
and royalties, are not allowed to be claimed in computing income subject to mining tax. In
addition, income unrelated to carrying on mining operations would not be subject to mining tax. The provision (relief) for income and mining taxes was as follows: 2003
    
    
    2002Year ended December 31
    
    2004
    
    
    (Restated)
    
    
    (Restated)Current taxesCanadian
    
    $
    165
    
    
    $
    (47
    )
    
    $
    129Foreign
    
    
    147
    
    
    
    11
    
    
    
    (10
    )312
    
    
    
    (36
    )
    
    
    119Deferred taxesCanadian
    
    
    97
    
    
    
    (59
    )
    
    
    (778
    )Foreign
    
    
    21
    
    
    
    58
    
    
    
    23118
    
    
    
    (1
    )
    
    
    (755
    )Income and mining taxes
    
    $
    430
    
    
    $
    (37
    )
    
    $
    (636
    )
 Earnings (loss) before income and mining taxes and minority interest, by geographic source, were as follows: 2003
    
    
    2002Year ended December 31
    
    2004
    
    
    (Restated)
    
    
    (Restated)Canada
    
    $
    842
    
    
    $
    67
    
    
    $
    (2,071
    )Foreign
    
    
    326
    
    
    
    109
    
    
    
    (20
    )$
    1,168
    
    
    $
    176
    
    
    $
    (2,091
    )
 144




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The reconciliation between taxes at the combined Canadian federal-provincial statutory income
tax rate and the effective income and mining tax rate was as follows: 2003
    
    
    2002Year ended December 31
    
    2004
    
    
    (Restated)
    
    
    (Restated)Provision (relief) at Combined Canadian federal-
provincial statutory income tax rate
    
    $
    466
    
    
    $
    71

    
    
    $
    (858
    )Resource and depletion allowances
    
    
    (77
    )
    
    
    (12
    )
    
    
    (27
    )Adjusted income taxes
    
    
    389
    
    
    
    59
    
    
    
    (885
    )Mining taxes
    
    
    66
    
    
    
    17
    
    
    
    20455
    
    
    
    76
    
    
    
    (865
    )Currency translation adjustments
    
    
    (7
    )
    
    
    42
    
    
    
    20Currency translation adjustments on long-term debt
    
    
    23
    
    
    
    48
    
    
    
    Non-deductible losses (non-taxable gains)
    
    
    (1
    )
    
    
    (33
    )
    
    
    30Benefit of net capital losses not previously recognized
    
    
    (42
    )
    
    
    
    
    
    
    Adjustment of prior year tax issues and tax rate changes
    
    
    (17
    )
    
    
    (142
    )
    
    
    (6
    )Foreign tax rate differences
    
    
    (46
    )
    
    
    (22
    )
    
    
    (12
    )Asset impairment charges
    
    
    70
    
    
    
    
    
    
    
    182Other
    
    
    (5
    )
    
    
    (6
    )
    
    
    15Effective income and mining taxes
    
    $
    430
    
    
    $
    (37
    )
    
    $
    (636
    )
 Deferred income and mining tax liabilities and assets consisted of the following: 2003
    
    
    2002December 31
    
    2004
    
    
    (Restated)
    
    
    (Restated)Liabilities:Property, plant and equipment
    
    $
    2,038
    
    
    $
    1,889
    
    
    $
    1,587Deferred charges and other assets
    
    
    135
    
    
    
    65
    
    
    
    23Long-term debt
    
    
    78
    
    
    
    48
    
    
    
    Other
    
    
    1
    
    
    
    3
    
    
    
    42,252
    
    
    
    2,005
    
    
    
    1,614Assets:Long-term debt
    
    
    
    
    
    
    
    
    
    
    23Post-retirement benefits
    
    
    217
    
    
    
    204
    
    
    
    142Asset retirement obligations
    
    
    69
    
    
    
    45
    
    
    
    44Tax loss carryforwards
    
    
    86
    
    
    
    70
    
    
    
    106Tax credit carryforwards
    
    
    12
    
    
    
    7
    
    
    
    6Other
    
    
    18
    
    
    
    
    
    
    
    402
    
    
    
    326
    
    
    
    321Valuation allowance
    
    
    (29
    )
    
    
    (27
    )
    
    
    (57
    )373
    
    
    
    299
    
    
    
    264Net deferred income and mining tax liability
    
    $
    1,879
    
    
    $
    1,706
    
    
    $
    1,350
 During 2001, tax legislation was passed in New Caledonia covering projects meeting certain
criteria. Goro Nickel S.A. qualifies for certain tax incentives under this legislation in
connection with its Goro project. These incentives include an income tax holiday during the
construction phase of the project and throughout a 15-year period commencing in the first year in
which commercial production is achieved, as defined by the applicable legislation, followed by a
five-year, 50 per cent income tax holiday. In addition, 145




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Goro Nickel S.A. qualifies for certain exemptions from indirect taxes such as import duties
during the construction phase and throughout the commercial life of the project. Certain of these
tax benefits, including the income tax holiday, are subject to an earlier phase out should the
project achieve a specified cumulative rate of return. We are subject to a branch profit tax
commencing in the first year in which commercial production is achieved, as defined by the
applicable legislation. To date, we have not realized any net income for New Caledonia tax
purposes and the benefits of this legislation are expected to apply with respect to any taxes
otherwise payable once the Goro project is in operation. In determining the likelihood of realizing an income tax asset we take into account a number
of factors, including current conditions and anticipated changes in mine or production plans. We have tax loss carryforwards in the amount of $372 million available for New Caledonia
income and branch profit tax purposes. The losses expire in the 2007-2009 period. Of these total
tax loss carryforwards, the benefit of losses in the amount of $168 million have not been
recognized. We have capital loss carry forwards in the amount of $41 million available for United Kingdom
income tax purposes to reduce taxable income in certain circumstances. The capital losses may be
carried forward indefinitely. The benefits of these tax loss carry forwards have not been
recognized for accounting purposes. In computing our income tax liability, no amount has been recorded in respect of additional
potential taxes which might arise should we distribute income realized in certain of our foreign
subsidiaries on the basis that it is our intention to reinvest such income in the foreign
operations of the relevant subsidiary. Should managements intentions change in respect of such
distribution, additional taxes, if any, would be recorded in respect of the distribution from, or
disposition or liquidation of, the relevant foreign entity. For those foreign entities from which
distributions occur on a regular basis, any additional taxes that would arise on such
distributions, if any, have been included in deriving the annual income tax provision for the year
in which the income is earned by the foreign subsidiary. The restatements reflect the impact of the change in accounting policy related to the change
in method of computing depreciation expense on a retroactive basis (see Note 2). These
restatements result in an increase in deferred income and mining tax liability for 2003 of $10
million (2002  decrease of $2 million). 146




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Note 8. Net earnings (loss) per Common Share The computation of basic and diluted earnings (loss) per share was as follows: 2003
    
    
    2002Year ended December 31
    
    2004
    
    
    (Restated)
    
    
    (Restated)Basic earnings (loss) per share computationNumerator:Net earnings (loss)
    
    $
    612
    
    
    $
    153
    
    
    $
    (1,477
    )Accretion of convertible debt
    
    
    (9
    )
    
    
    (7
    )
    
    
    (4
    )Dividends on preferred shares
    
    
    
    
    
    
    (6
    )
    
    
    (26
    )Premium on redemption of preferred shares
    
    
    
    
    
    
    (15
    )
    
    
    Net earnings (loss) applicable to common shares
    
    $
    603
    
    
    $
    125
    
    
    $
    (1,507
    )Denominator:Weighted-average common shares outstanding (thousands)
    
    
    187,550
    
    
    
    184,500
    
    
    
    182,830Basic earnings (loss) per common share
    
    $
    3.22
    
    
    $
    0.68
    
    
    $
    (8.24
    )Diluted earnings (loss) per share computationNumerator:Net earnings (loss) applicable to common shares
    
    $
    603
    
    
    $
    125
    
    
    $
    (1,507
    )Dilutive effect of:Convertible debentures
    
    
    6
    
    
    
    2
    
    
    
    Net earnings (loss) applicable to common shares, assuming dilution
    
    $
    609
    
    
    $
    127
    
    
    $
    (1,507
    )Denominator:Weighted-average common shares outstanding (thousands)
    
    
    187,550
    
    
    
    184,500
    
    
    
    182,830Dilutive effect of:Convertible debentures
    
    
    10,908
    
    
    
    4,360
    
    
    
    Stock options
    
    
    1,426
    
    
    
    1,707
    
    
    
    Warrants
    
    
    3,740
    
    
    
    1,308
    
    
    
    Weighted-average common shares outstanding, assuming dilution
    
    
    203,624
    
    
    
    191,875
    
    
    
    182,830Diluted earnings (loss) per common share
    
    $
    2.99
    
    
    $
    0.66
    
    
    $
    (8.24
    )
 At December 31, 2004, convertible debt which is convertible into nil Common Shares (2003 
nil; 2002  9,705,111), options on nil Common Shares (2003 819,000; 2002  7,476,506), Preferred
Shares convertible into nil Common Shares (2003  nil; 2002  11,277,868) and Warrants exercisable
for nil Common Shares (2003  nil; 2002  11,023,497) were excluded from the computation of diluted
earnings (loss) per Common Share because their effects were not dilutive. Effective January 1, 2005, on a retroactive basis, we will adopt revisions to CICA Section
3500, Earnings Per Share. The revisions relate primarily to (1) the use of year to date weighted
average rates when applying the treasury stock method and (2) instruments where, if an instrument
can be settled in cash or shares, an entity should assume that the instrument will be settled in
shares if share settlement is more dilutive. In 2004 and prior years, we presumed, with respect to
our LYON Convertible Notes, cash settlement and, accordingly, this instrument was not considered in
the calculation of diluted earnings per share. The impact of adopting these revisions will be a
decrease in diluted earnings per share for the year ended December 31, 2004 of 13 cents per share
(2003  1 cent; 2002  nil). 147




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Note 9. Inventories Inventories consisted of the following: December 31
    
    2004
    
    
    2003
    
    
    2002Finished metals
    
    $
    228
    
    
    $
    193
    
    
    $
    149In-process metals
    
    
    511
    
    
    
    478
    
    
    
    361Supplies
    
    
    95
    
    
    
    75
    
    
    
    66$
    834
    
    
    $
    746
    
    
    $
    576
 Note 10. Property, plant and equipment Property, plant and equipment consisted of the following: 2003
    
    
    2002December 31
    
    2004
    
    
    (Restated)
    
    
    (Restated)Mines and mining plants
    
    $
    3,003
    
    
    $
    2,902
    
    
    $
    2,806Processing facilities
    
    
    3,399
    
    
    
    3,383
    
    
    
    3,304Voiseys Bay project
    
    
    4,396
    
    
    
    3,817
    
    
    
    3,338Goro project
    
    
    699
    
    
    
    802
    
    
    
    637Other
    
    
    723
    
    
    
    598
    
    
    
    595Total property, plant and equipment, at cost
    
    
    12,220
    
    
    
    11,502
    
    
    
    10,680Accumulated depreciation
    
    
    3,317
    
    
    
    3,185
    
    
    
    3,052Accumulated depletion
    
    
    1,323
    
    
    
    1,284
    
    
    
    1,227Total accumulated depreciation and depletion
    
    
    4,640
    
    
    
    4,469
    
    
    
    4,279Property, plant and equipment, net
    
    $
    7,580
    
    
    $
    7,033
    
    
    $
    6,401
 At December 31, 2004, property, plant and equipment, at cost included capitalized
development costs relating to infill drilling, gathering geological and geotechnical data,
further reserve and other mineralized material evaluation and other related activities of $29
million (2003  $27 million; 2002  $22 million). In 2002, such costs in the amount of $71
million were written off as a result of the review of the carrying value of the Voiseys Bay
project and certain other assets discussed in Note 4. At December 31, 2004, the net carrying value of property, plant and equipment under
construction or development and not subject to depreciation or depletion was $5,226 million (2003 
$4,720 million; 2002  $4,109 million) which is comprised of amounts for the Voiseys Bay project
totalling $4,348 million (2003  $3,777 million; 2002  $3,299 million), the Goro project of $699
million (2003  $802 million; 2002  $637 million) and other assets under construction at our
operations of $179 million (2003  $141 million; 2002  $173 million). It is currently expected
that depreciation and depletion for the Voiseys Bay and Goro projects will commence in 2005 and
2007, respectively, in line with the projected start of operations at these projects. Capitalized
interest costs included in capital expenditures were $65 million in 2004 (2003  $54 million; 2002
 $27 million). 148




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Note 11. Long-term debt Long-term debt consisted of the following (repayment periods are shown in parentheses): December 31
    
    2004
    
    
    2003
    
    
    2002Inco Limited5.75% Convertible Debentures (a)
    
    $
    
    
    
    $
    
    
    
    $
    17315.75% Sterling Unsecured Loan Stock (2006) (b)
    
    
    45
    
    
    
    45
    
    
    
    45Term loan (2011) (c)
    
    
    200
    
    
    
    
    
    
    
    7.75% Notes (2012) (d)
    
    
    400
    
    
    
    400
    
    
    
    4005.70% Debentures (2015) (e)
    
    
    300
    
    
    
    300
    
    
    
    7.75% Convertible Debentures (f)
    
    
    
    
    
    
    
    
    
    
    1519.6% Debentures (g)
    
    
    
    
    
    
    
    
    
    
    159Convertible Debentures (2005-2023) (h)
    
    
    13
    
    
    
    15
    
    
    
    7.20% Debentures (2032) (i)
    
    
    400
    
    
    
    400
    
    
    
    400Subordinated Convertible Debentures (2005-2052) (j)
    
    
    100
    
    
    
    100
    
    
    
    PT International Nickel Indonesia TbkLoan facilities (3.25%) (2005  2006) (k)
    
    
    115
    
    
    
    192
    
    
    
    269OtherOther (7.65%) (20052031)
    
    
    85
    
    
    
    60
    
    
    
    461,658
    
    
    
    1,512
    
    
    
    1,643Long-term debt due within one year
    
    
    107
    
    
    
    103
    
    
    
    97$
    1,551
    
    
    $
    1,409
    
    
    $
    1,546
 (a) The 5.75 per cent Convertible Debentures were convertible, at the option of the holders,
into Common Shares, at a conversion price of U.S.$30 per share. The Debentures were redeemable, at
our option, commencing in 1999 at an initial premium of 2.875 per cent, declining annually to
redemption at par in 2004. The Debentures were redeemed in May 2003. (b) The 15.75 per cent Sterling Unsecured Loan Stock is redeemable in 2006 in sterling or, at
the option of the holders, in U.S. dollars at a fixed exchange rate of one pound sterling to $1.98.
In 1981, Inco Limited issued Pound Sterling 25 million aggregate principal amount of unsecured
bonds which were called unsecured loan stock in the United Kingdom. These bonds were issued
under a Trust Deed which contained many of the same provisions that are included in a trust
indenture covering the issuance of unsecured bonds in the United States. These bonds rank equally
and ratably with all of Incos other unsecured and unsubordinated debt. Holders of these debt
securities were defined as bondholders under the Trust Deed. Under United Kingdom law, unsecured
loan stock represent an unsecured bond issued in bearer form. (c) On December 23, 2004, we concluded a new $400 million term loan facility that matures on
December 23, 2011. The borrowings under the facility may be made in United States dollars in the
form of (i) United States Base Rate loans or (ii) London Interbank Offered Rate (LIBOR) loans.
Borrowings under this facility bears interest, when drawn, at a rate which varies based on the type
of borrowing and our credit ratings at the time of borrowing. As of December 31, 2004, there was
$200 million drawn under the facility. The floating rate interest payments with respect to the
$200 million drawn were swapped in exchange for a fixed rate of 5.098 per cent. As described in
part (l) below, the term loan facility requires that we maintain a ratio of Consolidated
Indebtedness, as defined in the term loan facility, to Tangible Net Worth, as defined in the term
loan facility, not to exceed 50:50. (d) On May 13, 2002, we issued and sold through an underwritten public offering in the United
States $400 million aggregate principal amount of 7.75% Notes due 2012. The Notes are redeemable,
at our option, at any time at a price equal to the greater of the principal amount of the Notes and
the sum of the present values of the remaining scheduled payments of principal and interest. The
interest payments under the Notes were swapped in exchange for a floating rate equal to LIBOR plus
3.25 per cent. (e) On September 26, 2003, we issued and sold through an underwritten public offering in the
United States $300 million aggregate principal amount of our 5.70% Debentures due 2015. The
Debentures are redeemable, at our option, at any time at a price equal to the greater of the
principal amount of the Debentures and the sum of the present values of the remaining scheduled
payments 149




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of principal and interest. The interest payments under the Debentures were swapped in
exchange for a floating rate equal to LIBOR plus 0.57 per cent. (f) The 7.75 per cent Convertible Debentures were convertible, at the option of the holders,
into Common Shares at a conversion price of U.S.$38.25 per share. The Debentures were redeemable,
at our option, in 1999 at a premium of 1.55 per cent, declining annually to redemption at par in
2001 and thereafter. The Debentures were redeemed in October 2003. (g) The 9.6 per cent Debentures were redeemable, at our option, commencing in 2002 at an
initial premium of 4.8 per cent, declining annually to redemption at par in 2012 and thereafter.
The interest payments under the Debentures were swapped in exchange for a floating rate equal to
LIBOR plus 3.05 per cent. The swap was cancelled in May 2003 and the Debentures were subsequently
redeemed in October 2003. (h) In March 2003, we issued and sold $273 million amount payable at maturity of Convertible
Debentures due 2023. Reference is made to Note 15 for the details of the Convertible Debentures. (i) On September 23, 2002, we issued and sold through an underwritten public offering in the
United States $400 million aggregate principal amount of 7.20% Debentures due 2032. The Debentures
are redeemable, at our option, at any time at a price equal to the greater of the principal amount
of the Debentures and the sum of the present values of the remaining scheduled payments of
principal and interest. (j) In March 2003, we issued and sold $227 million aggregate principal amount of 31/2%
Subordinated Convertible Debentures due 2052. Reference is made to Note 15 for the details of the
Subordinated Debentures. (k) Our 61 per cent-owned subsidiary, PT Inco, had outstanding at December 31, 2004 loan
facilities aggregating $115 million consisting of a $78 million expansion loan (2003  $131
million; 2002  $183 million); a $19 million loan (2003  $31 million; 2002 $44 million) and an
$18 million loan (2003  $30 million; 2002  $42 million). All loans under the loan facilities are
repayable in 13 equal semi-annual instalments commencing March 31, 2000. The expansion loan and
the $19 million loan bear interest, when drawn, equal to LIBOR plus 7/8 per cent in the first five
years and LIBOR plus one per cent in the last five years. The $18 million loan bears interest
equal to LIBOR plus 1 1/2 per cent. As security for these loans, PT Inco has assigned and pledged
certain of its cash and cash equivalents, sales agreements, service agreements and insurance
policies. (l) On May 28, 2004, we concluded a new $750 million syndicated revolving credit facility that
matures on May 28, 2009. This syndicated facility replaced several bilateral bank credit
agreements under which we had an aggregate of $680 million of available credit as of year-end 2003,
where $273 million of such $680 million would have otherwise expired on June 1, 2004 and the
balance in either June 2005, June 2006 or June 2007. Subject
to the approval of the lenders representing not less than 66 1/3 per cent in total
commitments under this new syndicated facility, the initial May 28, 2009 maturity date may be
extended for the commitments of those lenders who have approved such extension for an additional
one-year period on each May 28 anniversary date, beginning May 28, 2005. The borrowings under the
facility may be made in either Canadian dollars in the form of (a) Prime Rate loans or (b) in
Bankers Acceptances or in United States dollars in the form of (i) United States Base Rate loans
or (ii) London Interbank Offered Rate (LIBOR) loans. Borrowings under these facilities bear
interest, when drawn, at a rate which varies based on the type of borrowing and our credit ratings
at the time of borrowing. As of December 31, 2004, there were no amounts drawn under the new
facility. This syndicated credit facility and the term loan facility described in (c) above provide
that, so long as advances are outstanding or any letters of credit or guarantees issued pursuant to
the terms of these facilities are outstanding, we will be required to maintain a ratio of
Consolidated Indebtedness, as defined in the credit facility, to Tangible Net Worth, as defined in
the credit facility, not to exceed 50:50. At December 31, 2004 the ratio of Consolidated
Indebtedness to Tangible Net Worth was 25:75. The syndicated facility does not require any
acceleration or prepayment of outstanding balances if our credit ratings on outstanding debt
securities were downgraded or if there were a significant decline in our earnings, cash flow or in
the price of our publicly traded common shares or other equity securities. A downgrade in our
rating would, however, increase the interest rate payable on borrowings under the facility and,
conversely, any upgrade in our rating would reduce the interest rate payable on borrowings. As of
December 31, 2004, our outstanding debt securities were rated as investment grade by Moodys
Investors Service and Standard & Poors Ratings Services, with the specific ratings being Baa3
(stable outlook) by Moodys Investors Service and BBB (positive outlook) by Standard & Poors. 150




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Interest expense on long-term debt for the years 2004, 2003 and 2002 was $17 million, $36
million and $46 million, respectively. Taking into account the aforementioned interest rate swaps,
the weighted average effective interest rate on long-term debt at December 31, 2004 was 5.7 per
cent and approximately 51 per cent of long-term debt bears interest at rates that are subject to
periodic adjustments based on market interest rates. Approximately 97 per cent of long-term debt
is effectively payable in U.S. dollars. At December 31, 2004, long-term debt maturities for each of the five years through 2009 are:
2005  $107 million; 2006  $107 million; 2007  $19 million; 2008  $12 million; 2009  $62
million. Note 12. Post-retirement benefits Our pension plans cover essentially all employees. We also provide certain health care and
life insurance benefits for retired employees. The change in the funded status of post-retirement defined benefit plans was as follows: Post-retirement benefitsPension benefits
    
    
    other than pensionsYear ended December 31
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Change in post-retirement benefits obligationObligation at beginning of year
    
    $
    2,734
    
    
    $
    2,172
    
    
    $
    2,031
    
    
    $
    894
    
    
    $
    677
    
    
    $
    581Service cost
    
    
    38
    
    
    
    33
    
    
    
    27
    
    
    
    10
    
    
    
    10
    
    
    
    6Interest cost
    
    
    160
    
    
    
    153
    
    
    
    140
    
    
    
    50
    
    
    
    49
    
    
    
    41Plan amendments
    
    
    2
    
    
    
    20
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Changes in assumptions
    
    
    82
    
    
    
    73
    
    
    
    69
    
    
    
    47
    
    
    
    36
    
    
    
    68Actuarial losses (gains)
    
    
    31
    
    
    
    1
    
    
    
    18
    
    
    
    (26
    )
    
    
    11
    
    
    
    9Benefits paid
    
    
    (193
    )
    
    
    (184
    )
    
    
    (150
    )
    
    
    (41
    )
    
    
    (38
    )
    
    
    (32
    )Currency translation adjustments
    
    
    195
    
    
    
    466
    
    
    
    27
    
    
    
    65
    
    
    
    149
    
    
    
    4Obligation at end of year
    
    $
    3,049
    
    
    $
    2,734
    
    
    $
    2,172
    
    
    $
    999
    
    
    $
    894
    
    
    $
    677Change in pension plan assetsFair value of plan assets at beginning of year
    
    $
    1,857
    
    
    $
    1,367
    
    
    $
    1,507Actual return (loss) on plan assets
    
    
    193
    
    
    
    231
    
    
    
    (91
    )Employer contributions
    
    
    265
    
    
    
    142
    
    
    
    67Benefits paid
    
    
    (177
    )
    
    
    (165
    )
    
    
    (138
    )Currency translation adjustments
    
    
    135
    
    
    
    282
    
    
    
    22Fair value of plan assets at end of year
    
    $
    2,273
    
    
    $
    1,857
    
    
    $
    1,367Unfunded status of plans at end of year
    
    $
    (776
    )
    
    $
    (877
    )
    
    $
    (805
    )
    
    $
    (999
    )
    
    $
    (894
    )
    
    $
    (677
    )Unrecognized actuarial and investment losses
    
    
    1,106
    
    
    
    1,007
    
    
    
    864
    
    
    
    277
    
    
    
    252
    
    
    
    173Unrecognized prior service costs
    
    
    77
    
    
    
    84
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    Net post-retirement benefits asset
(liability) at end of year
    
    $
    407
    
    
    $
    214
    
    
    $
    126
    
    
    $
    (722
    )
    
    $
    (642
    )
    
    $
    (504
    )
 151




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The net post-retirement benefits asset (liability) is reflected in the Consolidated Balance
Sheet as follows: Post-retirement benefitsPension benefits
    
    
    other than pensionsDecember 31
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Deferred charges and other assets
    
    $
    422
    
    
    $
    226
    
    
    $
    138
    
    
    $
    
    
    
    $
    
    
    
    $
    Accrued payrolls and benefits
    
    
    (15
    )
    
    
    (12
    )
    
    
    (12
    )
    
    
    (51
    )
    
    
    (39
    )
    
    
    (29
    )Post-retirement benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (671
    )
    
    
    (603
    )
    
    
    (475
    )Net post-retirement benefits asset (liability)
    
    $
    407
    
    
    $
    214
    
    
    $
    126
    
    
    $
    (722
    )
    
    $
    (642
    )
    
    $
    (504
    )
 Post-retirement benefits expense included the following components: Post-retirement benefitsPension benefits
    
    
    other than pensionsYear ended December 31
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Service cost
    
    $
    38
    
    
    $
    33
    
    
    $
    27
    
    
    $
    10
    
    
    $
    10
    
    
    $
    6Interest cost
    
    
    160
    
    
    
    153
    
    
    
    140
    
    
    
    50
    
    
    
    49
    
    
    
    41Expected return on plan assets
    
    
    (169
    )
    
    
    (162
    )
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    Loss on plan settlement
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial and investment losses
    
    
    64
    
    
    
    62
    
    
    
    35
    
    
    
    14
    
    
    
    11
    
    
    
    6Amortization of unrecognized prior service costs
    
    
    14
    
    
    
    16
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Defined benefit pension and post-retirement
benefits other than pensions expense
    
    
    109
    
    
    
    102
    
    
    
    63
    
    
    
    74
    
    
    
    70
    
    
    
    53Defined contribution pension expense
    
    
    5
    
    
    
    5
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Post-retirement benefits expense
    
    $
    114
    
    
    $
    107
    
    
    $
    67
    
    
    $
    74
    
    
    $
    70
    
    
    $
    53
 The weighted-average assumptions used in the determination of the post-retirement benefits
expense and obligation were as follows: Post-retirement benefitsPension benefits
    
    
    other than pensionsYear ended December 31
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Discount rate
    
    
    6.0
    %
    
    
    6.5
    %
    
    
    7.0
    %
    
    
    6.0
    %
    
    
    6.5
    %
    
    
    7.0
    %Expected return on plan assets
    
    
    8.0
    %
    
    
    8.5
    %
    
    
    9.0
    %Rate of compensation increase
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.0
    %
 Effective December 31, 2004, the assumption for the discount rate used to determine the
pension benefits obligation was changed to 5.75 per cent. Effective January 1, 2005, the
assumption for the expected return on plan assets was changed to 7.75 per cent. The pension plan weighted-average asset allocations, by asset category were as follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Equity securities
    
    
    60
    %
    
    
    57
    %
    
    
    55
    %Debt securities
    
    
    40
    %
    
    
    43
    %
    
    
    45
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 152




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For the year ending December 31, 2005, we currently expect that our employer contributions
will amount to approximately $160 million. Estimated benefit payments for each of the next five
years through 2009 and the aggregate of the five years thereafter are as follows: Post-retirement benefitsPension benefits
    
    
    other than pensions2005
    
    
    $  209
    
    
    
    $  512006
    
    
    210
    
    
    
    532007
    
    
    196
    
    
    
    502008
    
    
    199
    
    
    
    522009
    
    
    200
    
    
    
    532010-2014
    
    
    986
    
    
    
    306
 The asset allocation policy for the plans is 40% fixed income and 60% equities for most of the
significant pension plans, with the exception of the United Kingdom pension plan which has a policy
mix of 50% fixed income and 50% equities. The actual asset mix is maintained fairly close to the
policy mix at most times by the use of a rigorous rebalancing policy. Equity
securities include Inco Limited common shares in the amount of $7 million (2003 - $7
million; 2002 - $5 million). The decision to invest in Inco Limited shares is made by independent
investment managers acting at their own discretion. The return on plan assets assumption has been based on an estimate of the future long-term
average return that can reasonably be earned on the assets of the pension fund. The starting point
for the calculation of this assumption is the current yield obtainable from the fixed income
portion of the portfolio. The yield available on the benchmark used, the Scotia Capital Universe
Bond Index (50% of the bond component) and the Scotia Capital Long Bond Index (the remainder of the
bond component), is used as the expected return on the bond indices since, in our view, this
represents the best estimate of long-term future returns for the fixed income portion of the
portfolio. Equity investments are assumed in aggregate to have an expected long-term future return
of 3% in excess of the yield available on long-term Government of Canada bonds; for 2002 and 2003
the 10Year+ index was used, and for 2004 and 2005 the 10-Year benchmark bond yield was used (this
change reflects the marketplace change and significant lack of issuance for 30 year maturities).
For the portion of the assets that are invested actively with investment managers, an additional
return expectation is included to recognize each managers target anticipated long-term value added
above the index return. We note that actual added value over the past periods has, in aggregate,
been substantially in excess of this amount. The weighted average of the returns determined for
each portion of the fund becomes the return on assets assumption (rounded to the nearest 0.25%). The projected pension benefits obligation and fair value of plan assets for pension plans with
accumulated benefits obligations in excess of plan assets were as follows: Pension benefitsDecember 31
    
    2004
    
    
    2003
    
    
    2002Projected benefits obligation
    
    $
    3,049
    
    
    $
    2,734
    
    
    $
    2,172Fair value of plan assets
    
    
    2,273
    
    
    
    1,857
    
    
    
    1,367Unfunded status
    
    $
    (776
    )
    
    $
    (877
    )
    
    $
    (805
    )
 The composite health care cost trend rate used in measuring post-retirement benefits other
than pensions was assumed to begin at 8 per cent, gradually declining to 4.5 per cent by 2010 and
remaining at that level thereafter. 153




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A one per cent change in the assumed composite health care cost trend rate would have the
following effects: Post-retirement benefitsother than pensions1% Increase
    
    
    1% DecreaseEffect on accumulated benefits obligation
    
    $
    148
    
    
    $
    (119
    )Effect on net periodic expense
    
    
    11
    
    
    
    (9
    )
 Note 13. Asset retirement obligation The estimation of asset retirement obligation costs depends on the development of
environmentally acceptable closure and post-closure plans, which, in some cases, may require
significant research and development to identify preferred methods for such plans which are
economically sound and which, in many cases, may not be implemented for several decades. We have
continued to utilize appropriate technical resources, including outside consultants, to develop
specific site closure and post-closure plans in accordance with the requirements of the various
jurisdictions in which we operate. Typical closure and progressive rehabilitation activities
include, where applicable, demolition of buildings, removal of underground equipment, sealing of
mine openings, treatment to reduce or prevent acid generation from stockpiled waste materials such
as tailings, general clean-up activities aimed at returning the area to an environmentally
acceptable condition, and post-closure care and maintenance. In accordance with environmental regulations adopted by the Province of Ontario in 1991, we
developed rehabilitation and site restoration plans associated with the eventual closure of our
operations in that province. Three closure plans were filed by the end of 1997, having previously
received approval from the Province of Ontario for the consolidation of our operating mines and
properties in that province into 15 sites for purposes of closure plans, and the remaining 12
closure plans were filed by the end of 1998. As a result of provincial regulatory changes which
became effective in 2000, the plans were refiled to meet these changes in 2001. We have continued
to develop future tailings disposal and water management alternatives to accommodate up to
approximately 40 years of future production. We believe that cost-effective tailings disposal
alternatives exist within the ongoing operating activities of the Sudbury operations which would
limit site restoration at closure to a care and maintenance activity, thus significantly reducing
the costs of such site restoration. In accordance with environmental regulations adopted by the Province of Manitoba in 1999, we
have developed reclamation plans associated with the eventual closure of operations in that
province. The Province of Manitoba has accepted the closure plans for all of our operations in the
province. Closure plans for the proposed mine and mill facilities were prepared and submitted in 1998 in
connection with the environmental review process of the Voiseys Bay project in the Province of
Newfoundland and Labrador. This plan is currently being updated and was submitted to the province
in August 2004. Closure plans were prepared for the Goro nickel project. The closure plan for the
tailings impoundment and overburden storage areas were included in the installation classes
application for this project dated May 2004. We follow a policy of progressive rehabilitation at our Indonesian operations whereby land
disturbed by mining activities is revegetated on an ongoing basis. The closure plan for PT Inco
was updated in 2004. Closure plans have been completed for the operating facilities in the United States and the
United Kingdom. Based on currently available information, there are no required significant site
restoration activities associated with these facilities. Substantial environmental expenditures are incurred on an ongoing basis which will
significantly reduce asset retirement obligation costs that may otherwise be incurred following the
closure of any sites. This progressive rehabilitation includes tailings management, land
reclamation and revegetation programs, decommissioning and demolition of plants and buildings, and
waste management activities. Operating costs associated with ongoing environmental and reclamation
programs, including progressive rehabilitation, aggregated $20 million in 2004, $39 million in 2003
and $13 million in 2002 and are included in cost of sales and other operating expenses. Capital
expenditures on environmental projects were $41 million in 2004, $28 million in 2003 and $9 million
in 2002. Although the ultimate amount to be incurred is uncertain, the total amount for asset
retirement obligations in respect of worldwide operations, to be paid primarily after cessation of
operations, is estimated to be approximately $1,050 million at December 31, 2004 154




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on an undiscounted basis. The estimate of the total liability for asset retirement
obligations has been developed from independent environmental studies including an evaluation of,
among other factors, currently available information with respect to closure plans and closure
alternatives, the anticipated method and extent of site restoration using current costs and
existing technology, and compliance with presently enacted laws, regulations and existing industry
standards. The total liability represents estimated expenditures associated with closure,
progressive rehabilitation and post-closure care and maintenance. Effective January 1, 2003, we adopted a new accounting standard of the CICA relating to asset
retirement obligations. This standard significantly changed the method of accounting for asset
retirement obligations and prior period financial statements have been restated to reflect this
change. Under the new standard, the asset retirement obligations are recognized when incurred and
recorded as liabilities at fair value assuming a credit-adjusted risk-free rate of approximately
5.5 per cent on average. Due to the nature of our closure plans, the timing of such cash
expenditures is expected to occur over a significant period of time being from one year for plans
which are already in progress and over 100 years for the longest plan. The liability is accreted
over time through periodic charges to cost of sales and other operating expenses. In addition, the
asset retirement cost is capitalized as part of the assets carrying value and depreciated over the
assets useful life. The following table shows the movement in the long-term portion of the
liability for asset retirement obligations. At December 31, 2004, the current portion of the
liability was $3 million (2003  $8 million; 2002  $7 million). Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Obligation at beginning of year
    
    $
    141
    
    
    $
    119
    
    
    $
    121Accretion expense
    
    
    8
    
    
    
    6
    
    
    
    5Liabilities settled
    
    
    (5
    )
    
    
    (6
    )
    
    
    (7
    )Revisions in estimated cash flows
    
    
    22
    
    
    
    22
    
    
    
    Net transfer from current liabilities
    
    
    5
    
    
    
    
    
    
    
    Obligation at end of year
    
    $
    171
    
    
    $
    141
    
    
    $
    119
 As of December 31, 2004, we had outstanding letters of credit in the amount of $23 million to
secure a portion of our closure costs related to the closure of three mines in Ontario. These
letters of credit have a term of one year and will automatically renew without any action by either
Inco or the counterparty until the earlier of (i) Inco having complied with the terms of the
certified closure plans or (ii) funds from such letters of credit being utilized by the government
authority responsible for overseeing such closure plans, to perform rehabilitation work if we did
not meet the requirements with respect to such closure plans. We are required to submit annual
updates on changes to the closure plans, including any decommissioning and rehabilitation work
completed during the previous year. In view of the uncertainties concerning environmental remediation, the ultimate cost of asset
retirement obligations could differ materially from the estimated amounts provided. The estimate
of the total liability for asset retirement obligation costs is subject to change based on
amendments to laws and regulations and as new information concerning our operations becomes
available. Future changes, if any, to the estimated total liability as a result of amended
requirements, laws, regulations and operating assumptions may be significant and would be
recognized prospectively as a change in accounting estimate, when applicable. Environmental laws
and regulations are continually evolving in all regions in which we operate. We are not able to
determine the impact, if any, of environmental laws and regulations that may be enacted in the
future on our results of operations or financial position due to the uncertainty surrounding the
ultimate form that such future laws and regulations may take. Note 14. Girardin Act financing On December 30, 2004, we entered into agreements covering the Girardin Act tax-advantaged
lease financing program (Girardin Financing) sponsored by the French Government for the Companys
nickel-cobalt project in New Caledonia. The Girardin Financing is subject to a ruling issued by
the French Minister of Economy, Finance and Industry (the Ruling). The Ruling provides that
certain investors who are French qualified investors under the Girardin Financing (Tax Investors)
may utilize certain tax deductions in connection with assets representing a portion of the Goro
nickel-cobalt projects processing plant which are financed by the Girardin Financing (Girardin
Assets). The Ruling requires that Goro Nickel S.A. (Goro), our subsidiary, and Inco, satisfy
certain conditions, including operating the Goro nickel-cobalt project for a minimum of five years. As part of the Girardin Financing, a special purpose entity (SPE), a variable interest
entity, was formed by the Tax Investors to finance the purchase, construction and installation of
the Girardin Assets. As we are the primary beneficiary of the SPE, our consolidated accounts
include the accounts of the SPE. The purchase, construction and installation of the Girardin
Assets by the SPE 155




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is funded by a combination of (a) non-refundable loans (Tax Advances) provided by the Tax
Investors pursuant to a tax loan agreement (Tax Loan Agreement) between the Tax Investors and the
SPE, and (b) loans provided to the SPE by a subsidiary of ours pursuant to a loan agreement (Loan
Agreement). Under a construction agreement between the SPE and Goro (Construction Agreement), Goro has
been appointed the construction agent on behalf of the SPE and is responsible for the purchase,
construction, installation and commissioning of the Girardin Assets. The costs for the
construction, installation and commissioning of the Girardin Assets total approximately $500
million and are payable in three instalments. In the event of a cost overrun, a fourth instalment
would be made to Goro with the additional funds provided pursuant to the Loan Agreement. Goro is
required to give notice of substantial completion of the Girardin Assets to the SPE by December 31,
2008 or such later date as may be approved by the French tax authorities. Upon such substantial
completion, the SPE will lease the Girardin Assets to Goro under an agreement between the SPE and
Goro (Lease Agreement). While the term of the Lease Agreement is twelve years, the related
agreements covering the Girardin Financing extend certain call and put options to Goro and the SPE,
respectively, covering both the Girardin Assets and the ownership interests in the SPE whereby,
assuming no default by Goro under the arrangements covering the Girardin Financing, one of these
options will be exercised after five years, resulting in the termination of the Lease Agreement and
the ownership of the Girardin Assets reverting to Goro. The Construction Agreement and the Lease Agreement contain certain events of default and
termination rights for the benefit of the SPE, including the failure of Goro to meet certain terms
and conditions of the Ruling. Following any termination of the Lease Agreement, (1) certain
termination compensation could be payable by Goro to the Tax Investors pursuant to the Add-Back
Indemnity (as defined below) and (2) Goro would be required to either (a) repay the entire then
outstanding amount drawn under the Loan Agreement or (b) assume all of the SPEs obligations under
the Loan Agreement. Upon the occurrence of such events, Goro would continue to have the right to
use the Girardin Assets, with the SPE retaining ownership thereof until all termination
compensation due by Goro under the Lease Agreement is paid. In addition, each of the Lease
Agreement and the Construction Agreement provides that Goro must indemnify the SPE and the Tax
Investors with respect to (1) the Add-Back Indemnity (as defined below), (2) increased taxes
incurred by the SPE or Tax Investors in respect of certain changes in tax laws or the imposition of
certain unanticipated taxes in New Caledonia and (3) operational losses incurred by the SPE or Tax
Investors arising out of third party claims in their capacity as owners of the Girardin Assets. In
the event of a termination of the Construction Agreement or the Lease Agreement or in the event
that the Tax Investors exercise their put option upon the occurrence of certain material adverse
environmental events relating to Goro prior to the fifth anniversary of substantial completion of
the Goro project, it is possible that the Tax Investors could lose their tax deductions in respect
of the Girardin Assets, thereby triggering an indemnity whereby Goro would be required to reimburse
the Tax Investors for the denial or reversal of their tax deductions under the Girardin Financing
by the French tax authorities and for any interest and penalties levied thereon by such authorities
(the Add-Back Indemnity). In connection with any termination event, the Tax Investors will
receive certain priorities relating to Goros assets over other creditors. As at December 31, 2004, the Tax Investors provided $41 million in Tax Advances which were
recorded as a deferred credit since these advances represent government assistance in the form of a
forgivable loan. The SPE expects to receive the balance of the Tax Advances in December 2005 and
2006 pursuant to the terms of the Tax Loan Agreement. It is currently estimated that such Tax
Advances will total $148 million, before fees to be paid to the Tax Investors, with the balance of
the Girardin Financing to be provided under the Loan Agreement. Of the remaining Tax Advances to
be made in 2005 and 2006, approximately 65 per cent of these amounts have been committed by the Tax
Investors, with the balance expected to be placed with additional investors. Included in Other Deferred Credits of $58 million is $41 million in respect of the Girardin
Financing. Note 15. Convertible debt On March 29, 2001, we issued and sold, on a bought deal basis, zero-coupon convertible notes
(LYON Notes), representing an aggregate amount payable at maturity of $438 million, which are due
and payable March 29, 2021, for net cash proceeds of $226 million. No interest is payable on the
LYON Notes prior to maturity except in connection with any term or condition where the holder
receives the then accreted value of the LYON Notes. The LYON Notes are convertible, at the option of the holder, at any time on or prior to their
maturity date into Common Shares at a fixed conversion rate of 26.5530 Common Shares per LYON Note,
representing an initial conversion price of $19.76 per share, with such conversion rate and price
being subject to certain anti-dilution adjustment provisions. Holders of LYON Notes also have a
special conversion right, exercisable on March 29 in 2007, 2011 and 2016, giving such holders the
right to convert the then accreted value of their LYON Notes into Common Shares based upon the then
market price for such shares. The LYON Notes are also subject to redemption at our option on or
after March 29, 2007 at their then accreted value. 156




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We have the right, subject to certain conditions, in connection with the exercise by a holder
of such conversion or special conversion rights, to pay such holders cash, in whole or in part, in
lieu of Common Shares. We also have the right, subject to certain conditions, in connection with
any redemption or certain purchases of the LYON Notes, to pay the redemption or purchase price in
Common Shares, based upon the then market price thereof, or in cash or any combination of Common
Shares and cash. We are required to offer to purchase the LYON Notes if there is a change in
control of Inco, as defined in the Trust Indenture dated as of March 29, 2001 between Inco and The
Bank of New York, as Trustee, occurring before March 29, 2007. The LYON Notes accrete over the 20-year term of the LYON Notes to their value at maturity
through periodic after-tax charges to retained earnings. The LYON Notes are not dilutive for
purposes of calculating diluted earnings per share based on our right to and current intention that
we will eventually meet the redemption and conversion terms of these LYON Notes in cash. Reference
is made to Note 8 for a discussion of a new accounting pronouncement affecting our LYON Notes that
is effective January 1, 2005. In March 2003, we issued and sold in concurrent private offerings (i) $273 million amount
payable at maturity of Convertible Debentures due March 14, 2023 (Convertible Debentures),
representing $249 million in gross proceeds to us, and (ii) $227 million aggregate principal amount
of Subordinated Convertible Debentures due March 14, 2052 (Subordinated Convertible Debentures).
The total combined gross proceeds were $476 million from these two issues of convertible debt
securities and the net cash proceeds were $470 million after deduction of commissions and other
after-tax expenses. The Convertible Debentures and Subordinated Convertible Debentures pay a cash
coupon of 1.0943 per cent and 3.5 per cent, respectively. The Convertible Debentures and the Subordinated Convertible Debentures are convertible at the
option of the holders into Common Shares at the conversion rates referred to below, subject to
certain anti-dilution adjustment provisions, only in the following circumstances: (i) if our Common
Share price, calculated over a specified period, has exceeded 120 per cent of the effective
conversion price of the Convertible Debentures or the Subordinated Convertible Debentures, as
applicable; (ii) if the trading price of the Convertible Debentures or the Subordinated Convertible
Debentures, as applicable, over a specified period has fallen below 95 per cent of the amount equal
to our then prevailing Common Share price times the applicable conversion rate; (iii) if we were to
call the Convertible Debentures or the Subordinated Convertible Debentures, as applicable, for
redemption; or (iv) if certain specified corporate events were to occur. Each Convertible
Debenture will be convertible into 31.9354 Common Shares, representing an initial conversion price
of approximately $28.61 per Common Share, and each Subordinated Convertible Debenture will be
convertible into 38.4423 Common Shares, representing a conversion price of approximately $26.01 per
Common Share. Holders of the Convertible Debentures have the right to have us redeem these Debentures at
their issue price plus accrued interest on March 14 in each of 2010, 2014 and 2018. We have the
right to redeem the Convertible Debentures at any time on or after March 19, 2010. We have the
right to redeem the Subordinated Convertible Debentures on or after March 19, 2008 if our Common
Shares trade over a specified period above 125 per cent of the conversion price for these
securities. Holders of the Subordinated Convertible Debentures have no right to require us to
redeem these subordinated securities. In meeting the conversion, redemption, payment at maturity
and other related terms of these convertible debt securities, we have the right, at our option, to
satisfy these obligations in cash, Common Shares or any combination thereof. In the case of the Convertible Debentures, these securities rank equally and rateably with all
of our existing and future unsecured and unsubordinated indebtedness. The Subordinated Convertible
Debentures are subordinated to all of our senior indebtedness, which includes, among other
obligations, all of our existing and future unsecured and unsubordinated indebtedness. For Canadian GAAP reporting purposes, these convertible debt securities were initially
recorded as $114 million of debt and $356 million of equity. The portion recorded as debt
represents the present value of the cash coupons discounted as at the date of issuance. 157




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Changes in the convertible debt were as follows: SubordinatedLYON
    
    
    Convertible
    
    
    ConvertibleNotes
    
    
    Debentures
    
    
    Debentures
    
    
    TotalDecember 31, 2001
    
    $
    231
    
    
    $
    
    
    
    $
    
    
    
    $
    231Accretion of convertible debt
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7December 31, 2002
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    238Convertible debt issued
    
    
    
    
    
    
    230
    
    
    
    126
    
    
    
    356Accretion of convertible debt
    
    
    9
    
    
    
    3
    
    
    
    
    
    
    
    12December 31, 2003
    
    
    247
    
    
    
    233
    
    
    
    126
    
    
    
    606Accretion of convertible debt
    
    
    9
    
    
    
    4
    
    
    
    
    
    
    
    13December 31, 2004
    
    $
    256
    
    
    $
    237
    
    
    $
    126
    
    
    $
    619
 Effective January 1, 2005, on a retroactive basis, we will adopt revisions to CICA Section
3860, Financial Instruments  Disclosure and Presentation. The revisions relate to the accounting
for instruments for which the issuer has the right to settle in cash or its own shares. Such an
instrument should be bifurcated between debt and equity in accordance with the revised standard.
This change will impact the accounting treatment for our LYON Convertible Notes, Convertible
Debentures due 2023 and 3 1/2% Subordinated Convertible Debentures due 2052 which are currently
treated as equity in accordance with EIC-71, Financial Instruments that may be Settled at the
Issuers Option in Cash or its own Equity Instruments. Consistent with this change, it will be
necessary to record interest expense in lieu of accretion charges with respect to these convertible
debt securities. The impact on our balance sheet as at December 31, 2004 will be an increase in
long-term debt of $210 million, an increase in deferred income and mining taxes of $11 million, a
decrease in convertible debt classified as equity of $201 million, an increase in deferred charges
of $7 million and a reduction in retained earnings of $13 million. In addition, as the revisions
will result in the retroactive restatement of our interest expense, there will also be an increase
in the amount of interest capitalized to date in respect of our development projects in the amount
of $7 million. 158




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Note 16. Preferred shares We are authorized to issue 45,000,000 Preferred Shares with no par value, which are issuable
in series for a maximum consideration of Cdn.$1.5 billion or its equivalent in other currencies. Preferred Shares Series E On August 21, 1996, we issued 9,424,657 5.5 per cent Convertible Redeemable Preferred Shares
Series E (Preferred Shares Series E), with an issue price of $50 per share, for an aggregate face
value of $471 million as partial consideration for the acquisition of Diamond Fields Resources Inc.
(Diamond Fields). The Preferred Shares Series E had an annual cumulative dividend of 5.5 per
cent payable in U.S. dollars or the equivalent in Canadian dollars. The Preferred Shares Series E
were convertible at any time into Common Shares at a conversion rate, subject to certain
adjustments in the event of stock splits, stock dividends, certain exchange or tender offers and
certain fundamental corporate changes, of 1.19474 Common Shares for each Preferred Share Series E
and were redeemable at our option after five years at an initial premium of 2.75 per cent,
declining annually to 0.55 per cent in 2005, and were subject to mandatory redemption at the $50
issue price (or the equivalent in Canadian dollars at the option of the holder), together with all
then accrued and unpaid dividends, on August 21, 2006. We had the right, subject to certain
exceptions, to satisfy the optional or mandatory redemption price payable by issuing Common Shares
based upon a formula equivalent to 95 per cent of a weighted-average trading price for the Common
Shares over a 20-day period ending five days prior to the particular redemption date. The
Preferred Shares Series E had general voting rights on the basis, subject to certain adjustments in
the event of certain fundamental corporate changes, of one vote per share and had a separate series
vote in the event of certain fundamental changes which required a series vote under applicable
corporate laws. The Preferred Shares Series E also had a right to elect two Directors in the event
that, and so long as, cumulative quarterly dividends on the series were in arrears for six or more
quarters. At the date of issue, a beneficial conversion feature for the Preferred Shares Series E
did not exist because the conversion price to common shares was above the then current market
price. Contingently issuable equity included Preferred Shares Series E contingently issuable upon
exercise of stock options held by former employees of Diamond Fields, which were exercisable
through to December 13, 2003. On April 17, 2003, all remaining outstanding options held by one
holder were exercised and upon exercise the holder received a combination of 485,471 Common Shares
with a value of $17 million and cash in the amount of $3 million partially in lieu of the Preferred
Shares Series E that had been called for redemption. On March 28, 2003, we announced that we would exercise our optional right to redeem all of our
issued and outstanding Preferred Shares Series E having a $472 million aggregate liquidation
preference and which were subject to mandatory redemption in 2006, with such redemption to be
effective May 1, 2003. Pursuant to their terms, we redeemed the Preferred Shares Series E by
paying the optional redemption price of $51.10 per share plus all accrued and unpaid dividends to
the May 1, 2003 redemption date. Holders of the Series E Preferred Shares had the right to convert
their shares into Common Shares at a fixed conversion rate of 1.19474 Common Shares for each
Preferred Share Series E held at any time prior to the May 1, 2003 redemption date. The conversion
rate represented an effective conversion price of $41.85 per Common Share. The total aggregate
redemption price for the Preferred Shares Series E was $487 million, including a redemption premium
of $11 million based upon the $50 issue price per Preferred Share Series E and $4 million in
accrued dividends. Changes in the Preferred Shares Series E were as follows: Numberof shares
    
    
    AmountDecember 31, 2001
    
    
    9,439,700
    
    
    $
    472Shares converted to Common Shares
    
    
    (100
    )
    
    
    December 31, 2002
    
    
    9,439,600
    
    
    
    472Shares converted to Common Shares
    
    
    (1,193
    )
    
    
    Shares redeemed
    
    
    (9,438,407
    )
    
    
    (472
    )December 31, 2003 and December 31, 2004
    
    
    
    
    
    $
    
 159




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Note 17. Warrants On December 14, 2000, we issued warrants upon the redemption of our Class VBN Shares. Each
Common Share purchase warrant (a Warrant) has an exercise price, for each whole Warrant, of
Cdn.$30.00 (or the equivalent in U.S. dollars) for the purchase of one Common Share at any time on
or before August 21, 2006. The exercise price and/or the number and kind of securities issuable on
the exercise of the Warrants are subject to adjustment in certain events, as set forth in the
Warrant Agreement dated as of December 1, 2000 among Inco Limited, CIBC Mellon Trust Company and
ChaseMellon Shareholder Services LLC, as Canadian and U.S. Warrant Agents, respectively, covering
the issuance of the Warrants. These adjustments include, among others, certain changes in our
capital structure such as any subdivision or consolidation of Common Shares, stock dividends or
other distributions, the consolidation, amalgamation or merger of Inco with another company, or the
transfer of all or substantially all of our assets. Changes in the Warrants were as follows: Numberof Warrants
    
    
    AmountDecember 31, 2001
    
    
    11,021,947
    
    
    $
    62Warrants issued
    
    
    1,782
    
    
    
    Warrants exercised
    
    
    (232
    )
    
    
    December 31, 2002
    
    
    11,023,497
    
    
    
    62Warrants issued
    
    
    416
    
    
    
    Warrants exercised
    
    
    (849
    )
    
    
    December 31, 2003
    
    
    11,023,064
    
    
    
    62Warrants issued
    
    
    1,878
    
    
    
    Warrants exercised
    
    
    (2,184
    )
    
    
    December 31, 2004
    
    
    11,022,758
    
    
    $
    62
 160




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##### Table of Contents



Note 18. Common shares We are authorized to issue an unlimited number of Common Shares without nominal or par value. Changes in the Common Shares were as follows: Numberof shares
    
    
    AmountDecember 31, 2001
    
    
    182,192,732
    
    
    $
    2,756Options exercised
    
    
    1,012,635
    
    
    
    14Shares issued under incentive plans
    
    
    32,633
    
    
    
    1Shares issued on conversion of Preferred Shares Series E
    
    
    119
    
    
    
    Shares issued on exercise of Warrants
    
    
    232
    
    
    
    December 31, 2002
    
    
    183,238,351
    
    
    
    2,771Options exercised
    
    
    3,130,556
    
    
    
    68Shares issued under incentive plans
    
    
    40,249
    
    
    
    1Shares issued on conversion of Preferred Shares Series E
    
    
    1,424
    
    
    
    Shares issued upon exercise of former Diamond Fields stock options
    
    
    485,471
    
    
    
    17Shares issued on conversion of debentures
    
    
    18,965
    
    
    
    1Shares issued on exercise of Warrants
    
    
    849
    
    
    
    December 31, 2003
    
    
    186,915,865
    
    
    
    2,858Options exercised
    
    
    1,175,525
    
    
    
    31Shares issued under incentive plans
    
    
    39,865
    
    
    
    1Shares issued on exercise of Warrants
    
    
    2,184
    
    
    
    Transfer from contributed surplus
    
    
    
    
    
    
    1December 31, 2004
    
    
    188,133,439
    
    
    $
    2,891
 Contingently issuable equity included Common Shares contingently issuable upon exercise of
stock options held by former employees of Diamond Fields Resources Inc. On April 17, 2003, all
remaining outstanding options held by one holder were exercised and upon exercise the holder
received a combination of 485,471 Common Shares with a value of $17 million and cash in the amount
of $3 million in lieu of certain securities that had been called for redemption. In September 1998, our Board of Directors, given the expiration of a shareholder rights plan
which had been implemented in October 1988, adopted a new shareholder rights plan that took effect
on October 3, 1998. This new plan, set forth in a Rights Plan Agreement entered into between Inco
Limited and CIBC Mellon Trust Company, as Rights Agent, is designed to (i) encourage the fair and
equal treatment of shareholders in connection with any bid for control by providing them with more
time than the minimum statutory period during which such bid must remain open in order to fully
consider their options, and (ii) provide the Board of Directors with additional time, if
appropriate, to pursue other alternatives to maximize shareholder value. The new plan, amended in certain respects by the Board of Directors in February 1999, was
approved by shareholders at the 1999 Annual and Special Meeting of Shareholders and will remain in
effect until October 2008 subject to reconfirmation of such plan, as may be further amended, by
holders of the voting securities at the annual meeting of shareholders to be held in April 2005.
The following represents a summary of some of the key terms of the plan. The rights issued under the plan will initially attach to and trade with the Common Shares and
no separate certificates will be issued unless an event triggering these rights occurs.
Certificates evidencing Common Shares will be legended to reflect that they evidence the rights
until the Separation Time (as defined below). Holders of the Convertible Debentures, Subordinated
Convertible Debentures and LYON Notes and the certificates of entitlement attached thereto (which
entitle their holders to receive rights in the event that the related security is converted into
Common Shares) will generally be entitled to receive, upon conversion of the relevant 161




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##### Table of Contents



security and presentment of the certificate of entitlement, respectively, rights in an amount
equal to the number of Common Shares issued upon conversion of such securities. The rights will separate from the Common Shares (Separation Time) and be transferable, trade
separately from the Common Shares and become exercisable only when a person acquires, or announces
their intention to acquire, beneficial ownership of 20 per cent or more of (i) the then outstanding
Voting Securities, or (ii) the then outstanding Common Shares alone, in either case without
complying with the permitted bid provisions of the plan (as summarized below), or without the
approval of the Board of Directors. Should such an acquisition occur, each right would entitle its
holder, other than the acquiring person or persons related to or acting jointly or in concert with
such person, to purchase additional Common Shares at a 50 per cent discount to the then current
market price. The acquisition by any person (an Acquiring Person) of 20 per cent or more of the
Common Shares or Voting Securities, other than by way of a permitted bid, is referred to as a
Flip-in-Event. Any rights held by an Acquiring Person will become void upon the occurrence of a
Flip-in-Event. A permitted bid is a bid made to all holders of the outstanding Voting Securities that is
open for at least 60 days. If, at the end of such 60-day period, more than 50 per cent of the then
outstanding Common Shares, other than those securities owned by the party making the bid and
certain related persons, have been tendered, such party may take up and pay for the Common Shares
but must extend the bid for a further 10 business days to allow other shareholders to tender, thus
providing shareholders who had not tendered to the bid with enough time to tender to the bid once
it is clear that a majority of Common Shares have been tendered. Under this plan, we can (i) waive our application to enable a particular takeover bid to
proceed, in which case the plan will be deemed to have been waived with respect to any other
takeover bid made prior to the expiry of any bid subject to such waiver or (ii) with the prior
approval of the holders of Voting Securities or rights, redeem the rights for nominal consideration
at any time prior to a Flip-in-Event. Note 19. Stock compensation plans The stock option plans authorize the granting of options to key employees to purchase Common
Shares at prices not less than 100 per cent of their market value on the day the option is granted.
The 2001 employee plan, which replaced the 1997 employee plan and has a term of five years,
authorized the granting of options to purchase up to 6,000,000 Common Shares. A Non-Employee
Director Share Option Plan, which came into effect in April 2002 and has a term of five years,
authorized the granting of options to the non-employee members of our board of directors to
purchase up to 300,000 Common Shares. In February 2004, our Board of Directors suspended the
operation of this plan. The stock option plans provide that no shares subject to any options
granted shall be purchasable after 10 years from the date of grant and also include an
anti-dilution provision to protect the option holder in the event of stock splits or other
significant capital changes. At December 31, 2004, outstanding options for 1,460,400 Common Shares also carry share
appreciation rights (SARs). These SARs entitle an optionee, in lieu of exercising an option to
purchase Common Shares, to surrender all or a portion of the related option in exchange for an
amount equal to the difference between the then market price per share and the exercise price per
share specified in the stock option, multiplied by the number of shares covered by the stock
option, or portion thereof so surrendered. We may elect to deliver Common Shares, cash, or a
combination of Common Shares and cash, equal in value to such difference. Compensation expense in
respect of SARs for the years 2004, 2003 and 2002 was $(3) million, $36 million and $7 million,
respectively. One-half of stock options granted are exercisable on or after six months from the grant date,
with the remaining options exercisable on or after 18 months from the grant date. Pursuant to our mid-term incentive plans (MTIPs), awards in the form of Common Shares are made
to certain key employees subject to transfer, sale and encumbrance restrictions for a three-year
period from the date of the award. In the year ended December 31, 2004, 39,865 Common Shares were
awarded in respect of MTIPs (2003  40,249; 2002  32,633). 162




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##### Table of Contents



Changes in Common Share options outstanding are summarized as follows: Number of Common SharesYear ended December 31
    
    2004
    
    
    2003
    
    
    2002Outstanding at beginning of year
    
    
    4,572,605
    
    
    
    7,476,506
    
    
    
    7,729,634Options granted
    
    
    1,047,500
    
    
    
    1,155,000
    
    
    
    1,377,000Options exercised
    
    
    (1,251,325
    )
    
    
    (3,867,151
    )
    
    
    (1,140,700
    )Options terminated
    
    
    (286,750
    )
    
    
    (191,750
    )
    
    
    (489,428
    )Outstanding at end of year
    
    
    4,082,030
    
    
    
    4,572,605
    
    
    
    7,476,506Available for grant at December 31
    
    
    2,792,750
    
    
    
    3,785,000
    
    
    
    4,928,250Exercisable at December 31
    
    
    3,540,780
    
    
    
    3,954,107
    
    
    
    6,765,756
 Changes in the weighted-average exercise price of Common Share options are summarized as follows: Weighted-average exercise priceYear ended December 31
    
    2004
    
    
    2003
    
    
    2002Outstanding at beginning of year
    
    $
    23.43
    
    
    $
    21.42
    
    
    $
    21.49Options granted
    
    
    36.40
    
    
    
    20.90
    
    
    
    17.80Options exercised
    
    
    (23.63
    )
    
    
    (18.63
    )
    
    
    (14.11
    )Options terminated
    
    
    (26.91
    )
    
    
    (26.74
    )
    
    
    (29.43
    )Outstanding at end of year
    
    $
    26.45
    
    
    $
    23.43
    
    
    $
    21.42
 The following table summarizes information about Common Share options outstanding at December
31, 2004. Common Share Options Outstanding
    
    
    Common Share Options ExercisableNumber
    
    
    Weighted-average
    
    
    
    
    
    
    NumberRange of
    
    outstanding
    
    
    remaining
    
    
    
    
    
    
    exercisableexercise
    
    at December
    
    
    contractual life
    
    
    Weighted-average
    
    
    at December
    
    
    Weighted-averageprices
    
    31, 2004
    
    
    (years)
    
    
    exercise price
    
    
    31, 2004
    
    
    exercise price$   11-16
    
    
    344,400
    
    
    
    3.6
    
    
    
    $13.42
    
    
    
    344,400
    
    
    
    $13.4217-19
    
    
    969,850
    
    
    
    6.2
    
    
    
    17.63
    
    
    
    969,850
    
    
    
    17.6320-22
    
    
    715,850
    
    
    
    8.1
    
    
    
    20.73
    
    
    
    715,850
    
    
    
    20.7327-28
    
    
    81,000
    
    
    
    3.9
    
    
    
    27.52
    
    
    
    63,500
    
    
    
    27.4932-35
    
    
    929,180
    
    
    
    1.8
    
    
    
    33.63
    
    
    
    929,180
    
    
    
    33.6336-37
    
    
    1,041,750
    
    
    
    9.0
    
    
    
    36.40
    
    
    
    518,000
    
    
    
    36.41$   11-37
    
    
    4,082,030
    
    
    
    6.0
    
    
    
    $26.45
    
    
    
    3,540,780
    
    
    
    $24.97
 The expiration dates of Common Share options outstanding at December 31, 2004 ranged from
February 15, 2005 to February 3, 2014. At December 31, 2004, there were 277 employees
participating in the Common Share option plans. As discussed in Note 2, effective January 1, 2003, we prospectively adopted the fair value
method of accounting for stock-based compensation. Had we elected to recognize the cost of
stock-based compensation based on the estimated fair value of stock options granted, net earnings
(loss) would have been as follows for 2002: 2002Year ended December 31
    
    (Restated)Pro forma net loss
    
    $
    (1,481
    )Pro forma basic loss per common share
    
    $
    (8.26
    )Pro forma diluted loss per common share
    
    $
    (8.26
    )
 163




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##### Table of Contents



For 2004, an expense of $10 million (2003  $3 million) was charged to earnings with an
equivalent offset credited to contributed surplus to reflect the fair value of stock options
granted to employees in 2004 and 2003. For 2004, a transfer of $1 million (2003  nil) was made
from contributed surplus to common shares in respect of exercised options. The fair value of each
stock option granted is estimated on the date of grant using an option pricing model with the
following assumptions: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Stock price at grant date
    
    $
    36.40
    
    
    $
    20.85
    
    
    $
    17.62Exercise price
    
    $
    36.40
    
    
    $
    20.85
    
    
    $
    17.62Weighted-average fair value of
options granted during the year
    
    $
    10.37
    
    
    $
    6.29
    
    
    $
    5.92Expected life of options (years)
    
    
    3.4
    
    
    
    3.0
    
    
    
    3.0Expected stock price volatility
    
    
    35.0
    %
    
    
    41.1
    %
    
    
    44.1
    %Expected dividend yield
    
    
    
    %
    
    
    
    %
    
    
    
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    2.1
    %
    
    
    3.6
    %
 Note 20. Nature of operations and segment information We are a leading producer of nickel and an important producer of copper, precious metals and
cobalt. Our operations consist of the finished products segment, which comprises the mining and
processing operations in Ontario and Manitoba, Canada, and refining operations in the United
Kingdom and interests in refining operations in Japan and other Asian countries, and the
intermediates segment, which comprises the mining and processing operations in Indonesia, where
nickel-in-matte, an intermediate product, is produced and sold primarily into the Japanese market.
In addition, we hold mineral claims and licenses for development projects which include the
Voiseys Bay nickel-copper-cobalt project under development in the Province of Newfoundland and
Labrador and the Goro nickel-cobalt project under development in the French Overseas Territory of
New Caledonia. Net sales to customers by product were as follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Primary nickel
    
    $
    3,503
    
    
    $
    2,109
    
    
    $
    1,654Copper
    
    
    364
    
    
    
    171
    
    
    
    184Precious metals
    
    
    246
    
    
    
    114
    
    
    
    238Cobalt
    
    
    71
    
    
    
    17
    
    
    
    24Other
    
    
    94
    
    
    
    63
    
    
    
    61$
    4,278
    
    
    $
    2,474
    
    
    $
    2,161
 Net sales to customers include sales at market prices to affiliates in Taiwan and South Korea
aggregating $759 million in 2004, $547 million in 2003 and $346 million in 2002. No single
non-affiliated customer accounted for more than 10 per cent of total sales in 2004, 2003 or 2002.
At December 31, 2004, accounts receivable included amounts due from affiliates of $202 million
(2003  $100 million; 2002  $19 million). 164




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##### Table of Contents



Data by operating segments Finished products
    
    
    Intermediates
    
    
    Development Projects
    
    
    Eliminations
    
    
    TotalYear ended December 31
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002(Restated)
    
    
    
    
    
    
    (Restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Restated)Net sales to customers
    
    $
    4,120
    
    
    
    2,369
    
    
    
    2,096
    
    
    $
    158
    
    
    
    105
    
    
    
    65
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    4,278
    
    
    
    2,474
    
    
    
    2,161Intersegment sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    634
    
    
    
    404
    
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (634
    )
    
    
    (404
    )
    
    
    (256
    )
    
    
    
    
    
    
    
    
    
    
    Net sales
    
    $
    4,120
    
    
    
    2,369
    
    
    
    2,096
    
    
    $
    792
    
    
    
    509
    
    
    
    321
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    (634
    )
    
    
    (404
    )
    
    
    (256
    )
    
    $
    4,278
    
    
    
    2,474
    
    
    
    2,161Earnings (loss) before income
and mining taxes and minority
interest by segment
    
    $
    1,155
    
    
    
    270
    
    
    
    303
    
    
    $
    430
    
    
    
    190
    
    
    
    70
    
    
    $
    (220
    )
    
    
    (18
    )
    
    
    (2,353
    )
    
    $
    (8
    )
    
    
    (31
    )
    
    
    (10
    )
    
    $
    1,357
    
    
    
    411
    
    
    
    (1,990
    )Expenses (income) not
specifically
allocable to segments:Corporate selling, general
and administrative expenses
    
    
    
    
    
    
    128
    
    
    
    118
    
    
    
    86Currency translation adjustments
    
    
    
    
    
    
    85
    
    
    
    177
    
    
    
    5Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    44
    
    
    
    50Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (104
    )
    
    
    (40
    )Earnings (loss) before income
and mining taxes and
minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,168
    
    
    
    176
    
    
    
    (2,091
    )Depreciation and depletion
    
    $
    186
    
    
    
    167
    
    
    
    188
    
    
    $
    62
    
    
    
    60
    
    
    
    54
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    248
    
    
    
    227
    
    
    
    242Capital expenditures
    
    $
    217
    
    
    
    158
    
    
    
    132
    
    
    $
    119
    
    
    
    45
    
    
    
    42
    
    
    $
    596
    
    
    
    342
    
    
    
    556
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    932
    
    
    
    545
    
    
    
    730Identifiable assets at December 31
    
    $
    2,793
    
    
    
    2,496
    
    
    
    2,098
    
    
    $
    1,580
    
    
    
    1,387
    
    
    
    1,275
    
    
    $
    5,387
    
    
    
    4,648
    
    
    
    4,011
    
    
    $
    (54
    )
    
    
    (46
    )
    
    
    (15
    )
    
    $
    9,706
    
    
    
    8,485
    
    
    
    7,369Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,017
    
    
    
    578
    
    
    
    1,227Total assets at December 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,723
    
    
    
    9,063
    
    
    
    8,596
 Reference is made to Note 4 which discusses certain asset impairment charges included
above under loss before income and mining taxes and minority interest for Development Projects. Other assets, which are not allocated to operating segments, consist of corporate assets,
principally cash and cash equivalents, investments, deferred charges, pension assets and certain
receivables. Data by geographic location Net sales to customers
    
    Property, plant and equipmentyear ended December 31
    
    
    at December 312004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002(Restated)Canada
    
    
    $   100
    
    
    $
    71
    
    
    $
    80
    
    
    $
    5,634
    
    
    $
    5,048
    
    
    $
    4,567United States
    
    
    1,353
    
    
    
    669
    
    
    
    667
    
    
    
    21
    
    
    
    22
    
    
    
    22United Kingdom
    
    
    691
    
    
    
    357
    
    
    
    443
    
    
    
    20
    
    
    
    26
    
    
    
    24Indonesia
    
    
    158
    
    
    
    104
    
    
    
    65
    
    
    
    1,166
    
    
    
    1,108
    
    
    
    1,125New Caledonia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    695
    
    
    
    798
    
    
    
    635Japan
    
    
    618
    
    
    
    374
    
    
    
    313
    
    
    
    18
    
    
    
    19
    
    
    
    18China
    
    
    583
    
    
    
    379
    
    
    
    216
    
    
    
    25
    
    
    
    11
    
    
    
    10Other
    
    
    775
    
    
    
    520
    
    
    
    377
    
    
    
    1
    
    
    
    1
    
    
    
    Total foreign
    
    
    4,178
    
    
    
    2,403
    
    
    
    2,081
    
    
    
    1,946
    
    
    
    1,985
    
    
    
    1,834Total
    
    
    $4,278
    
    
    $
    2,474
    
    
    $
    2,161
    
    
    $
    7,580
    
    
    $
    7,033
    
    
    $
    6,401
 Net sales to customers by geographic location are based on the location in which the sale
originated. 165




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##### Table of Contents



Note 21. Financial instruments and commodities contracts The carrying values for all financial instruments and commodities contracts approximated fair
values with the following exceptions: December 31
    
    2004
    
    
    2003
    
    
    2002Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairvalue
    
    
    value
    
    
    value
    
    
    value
    
    
    value
    
    
    valueFinancial assets:Deferred charges and other assets,
excluding pension asset (Note 12)
    
    $
    147
    
    
    $
    228
    
    
    $
    93
    
    
    $
    163
    
    
    $
    70
    
    
    $
    88Financial liabilities:Long-term debt including amount due
within one year
    
    
    1,658
    
    
    
    1,889
    
    
    
    1,512
    
    
    
    1,724
    
    
    
    1,643
    
    
    
    1,686Derivatives:LME forward nickel contracts
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    7Platinum put options
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Platinum call options
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Palladium fixed price swaps
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    10Platinum fixed price swaps
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (3
    )Gold fixed price swaps
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Fuel oil swaps
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    3Forward currency contracts
    
    
    14
    
    
    
    52
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    62Interest rate swaps
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    8
 The fair value of financial instruments at December 31 is based on relevant market
information, the contractual terms of the applicable instrument or contract and, in some cases the
application of a financial model. The fair value of investments, including debt securities and
equity investments, is based on market prices at the reporting date for those or similar
investments. The fair value of long-term debt, platinum put and call options, and the interest
rate swaps are estimated based on market prices. The fair value of LME forward nickel, fuel oil
swaps, palladium swaps, platinum swaps, gold swaps and forward currency contracts generally reflect
the estimated amounts that we would receive (pay) to terminate such contracts at the reporting
date, thereby taking into account the current unrealized gains or losses in respect of open
contracts. In general, we do not use derivative instruments to hedge our exposure to fluctuating nickel
prices. We do enter into LME forward purchase contracts which are substantially offset by fixed
price customer contracts in order to more fully expose us to nickel price risk. We also enter into
LME forward sales contracts to minimize nickel price risk associated with purchased nickel
inventories of intermediates and finished nickel products. In respect of these types of hedges, at
December 31, 2004 we had outstanding LME forward contracts to purchase 6,426 tonnes of nickel
during the 2005 to 2007 period at an average price of $11,824 per tonne ($5.36 per pound) and LME
forward contracts to sell 1,464 tonnes of nickel during 2005 at an average price of $14,543 per
tonne ($6.60 per pound). At December 31, 2004, we had outstanding put option contracts, giving us the right but not the
obligation, to sell 114,000 troy ounces of platinum at an average price of $701 per troy ounce at
various dates over the 2005 to 2008 period, and sold call option contracts, giving the buyer the
right, but not the obligation, to purchase 114,000 troy ounces of platinum at an average price of
$816 per troy ounce during the same time period. Depending on market conditions, we enter into precious metals hedging contracts with various
financial counterparties. These contracts, in the form of swap contracts (whereby we
simultaneously sell at a fixed price and buy the same quantities for the same maturity dates at a
floating price), are intended to provide certain minimum price realizations in respect of a portion
of our future production of such metals. At December 31, 2004, we had outstanding swap contracts
to exchange payments on 9,390 troy ounces of palladium during 2005. Under the swap contracts, we
receive a fixed price of $295 per troy ounce and pay a floating price based on monthly average spot
prices. At December 31, 2004, we had outstanding swap contracts to exchange payments on 42,828
troy ounces 166




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of platinum in aggregate over the period from 2005 to 2006. Under these swap contracts, we
receive fixed prices at an average price of $648 per troy ounce and pay a floating price based on
monthly average spot prices. At December 31, 2004, we had outstanding swap contracts to exchange
payments on 29,956 troy ounces of gold in aggregate during 2005. Under these swap contracts, we
receive fixed prices at an average price of $390 per troy ounce and pay a floating price based on
monthly average spot prices. We use fuel oil swap contracts to hedge the effect of fuel oil price changes in respect of a
portion of our energy requirements in Indonesia. Under these contracts, we receive or make
payments based on the difference between a fixed and a floating price for fuel oil. At December
31, 2004, we had entered into swap contracts with financial institutions to exchange payments on
83,650 tonnes of fuel oil during 2005. Under the swap contracts, we pay fixed prices averaging
$165 per tonne for fuel oil and receive a floating price based on monthly average spot price
quotations. At December 31, 2004, we had outstanding forward currency contracts to purchase Aus.$300
million at average exchange rates of $0.670 during the 2005 to 2007 period. At December 31, 2004,
we also had outstanding forward currency contracts to purchase GBP14 million at average exchange
rates of 1.746 during 2005 and 2006. The purpose of these contracts is to eliminate the risk of
exchange rate movements on a portion of the future construction costs of the planned production
facilities for the Goro project in New Caledonia. We also have outstanding forward currency
contracts to purchase Aus.$45 million which are completely offset by forward currency contracts to
sell Aus.$45 million. These contracts were originally engaged as a hedge of a portion of the
future construction costs of the planned production facilities for the Goro project, however, due
to changes in the scope and timing of construction, these contracts ceased to be effective. Total
gains in the amount of $10 million were recorded in 2004 in Other Income relating to contracts that
were either ineffective or for which we did not hedge account. We also recorded a gain of $9
million in Goro Project Suspension Costs in respect of euro denominated contracts which ceased to
be effective as a result of the suspension of our Goro project. At December 31, 2004, we had outstanding forward currency contracts to purchase Cdn.$230
million at an average exchange rate of $0.749 during 2005. The purpose of these contracts is to
eliminate the risk of exchange rate movements on a portion of the future construction costs of the
planned production facilities for the initial phase of the Voiseys Bay project. We also had
outstanding at December 31, 2004, forward currency contracts to purchase Cdn.$79 million at an
average exchange rate of $0.840 during 2005 and 2006. The purpose of these contracts is to
eliminate the risk of exchange rate movements on a portion of the future construction costs of a
capital asset at our Sudbury operations. In addition, at December 31, 2004 we had outstanding
forward currency contracts to purchase Cdn.$170 million at an average exchange rate of $0.808
during 2005. The purpose of these contracts is to offset the foreign exchange risk associated with
a portion of our Canadian denominated tax liability which is due in February 2005 in respect of the
2004 calendar year. As at December 31, 2004, we had an outstanding interest rate swap of a notional principal
amount of $300 million on our 5.70% Debentures due 2015, whereby we receive a fixed rate of
interest of 5.70 per cent and pay a floating rate at 0.57 per cent over 6-month LIBOR. We also had
an interest rate swap of a notional principal amount of $400 million on our 7.75% Notes due 2012,
whereby we receive a fixed rate of interest of 7.75 per cent and pay a floating rate at 3.25 per
cent over 6-month LIBOR. In addition, we had an interest rate swap of a notional amount of $200
million on our term loan due 2011, whereby we initially receive a floating rate at 0.875 per cent
over 3-month LIBOR and pay a fixed rate of 5.098 per cent. We are exposed to credit risk in the event of non-performance by counterparties in connection
with our derivative contracts. We do not obtain collateral or other security to support derivative
instruments subject to credit risk but mitigate this risk by dealing only with financially sound
counterparties and, accordingly, do not anticipate loss for non-performance. There is no
substantial concentration of credit risk resulting from these contracts. We had a limited recourse liability in respect of the sale of undivided interests in certain
accounts receivable in the amount of $45 million at December 31, 2004. 167




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Note 22. Commitments and contingencies (a) Commitments The following table summarizes as of December 31, 2004 certain of our long-term contractual
obligations and commercial commitments for each of the next five years and thereafter: Payments due in2005
    
    
    2006
    
    
    2007

    
    
    2008
    
    
    2009
    
    
    ThereafterPurchase obligations (1)
    
    $
    373
    
    
    $
    40
    
    
    $
    18
    
    
    $
    6
    
    
    $
    4
    
    
    $
    19Operating leases
    
    
    35
    
    
    
    25
    
    
    
    16
    
    
    
    6
    
    
    
    2
    
    
    
    2Other
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    85Total
    
    $
    410
    
    
    $
    67
    
    
    $
    37
    
    
    $
    15
    
    
    $
    9
    
    
    $
    106
   (1) These purchase obligations largely relate to the Voiseys Bay and Goro projects
with the balance comprising routine orders to purchase goods and services at current operating
locations. In connection with our 1996 acquisition of Diamond Fields Resources Inc., we assumed an
obligation to pay to a company retained by Diamond Field Resources Inc. to provide certain
exploration and other services an annual royalty amounting to three per cent of the net proceeds
received from the sale of ores, metals and other minerals produced from our Voiseys Bay project,
after deducting certain costs associated with the production and sale of the ores, metals and
minerals produced. We have not incurred any such royalty payments to date since the Voiseys Bay
project is not yet in production. (b) Contingencies In the course of our operations, we are subject to routine claims and litigation incidental to
our business, to various environmental proceedings, and to other litigation related to such
business. With respect to the environmental proceedings currently pending or threatened against
us, they include (1) a proceeding brought under the Ontario class action legislation covering
claims relating to the alleged decline in property values in a community where we had operated a
nickel refinery over the 1918  1984 period, (2) claims for personal injury, (3) enforcement
actions, (4) alleged violations of, including exceeding regulatory limits relating to discharges
under, certain environmental or similar laws and regulations applicable to our operations in Canada
and elsewhere and (5) certain claims dating back a number of years in which one of our subsidiaries
was designated, under the United States federal environmental law known as Superfund or CERCLA,
as a potentially responsible party. We believe that the ultimate resolution of such proceedings,
claims and litigation will not significantly impair our operations or have a material adverse
effect on our financial position or results of operations. In connection with the Girardin Financing described under Note 14, we provided certain
guarantees on behalf of Goro pursuant to which we guaranteed payments due from Goro of up to a
maximum amount of $100 million (Maximum Amount) in connection with the Add-Back Indemnity. We
also provided an additional guarantee covering the payments due from Goro of (a) amounts exceeding
the Maximum Amount in connection with the Add-Back Indemnity and (b) certain other amounts payable
by Goro under the Lease Agreement covering the Girardin Assets. We provided a guarantee covering certain termination payments due from Goro to the supplier
under an electricity supply agreement (ESA) entered into in October 2004 for the Goro
nickel-cobalt project. The amount of the termination payments guaranteed depends upon a number of
factors, including whether any termination of the ESA is as a result of a default by Goro and the
date on which an early termination of the ESA were to occur. If Goro defaults under the ESA, the
termination payment could reach up to an amount of 145 million Euros. This maximum amount could be
payable if termination of the ESA occurred prior to the anticipated start date for supply of
electricity to the project. Once the supply of electricity under the ESA to the project begins,
the guaranteed amounts will decrease over the life of the ESA. 168




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Note 23. Supplemental information Supplemental information in connection with the Consolidated Statement of Cash Flows follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Interest paid, net of capitalized interest
    
    $
    25
    
    
    $
    48
    
    
    $
    38Income and mining taxes paid (refunded), net
    
    $
    94
    
    
    $
    120
    
    
    $
    (9
    )Cash
    
    $
    240
    
    
    $
    42
    
    
    $
    36Cash equivalents
    
    
    836
    
    
    
    376
    
    
    
    1,051Cash and cash equivalents
    
    $
    1,076
    
    
    $
    418
    
    
    $
    1,087
 169




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Note 24. Significant differences between Canadian and United States GAAP Our consolidated financial statements are prepared in accordance with Canadian GAAP. The
differences between Canadian and United States GAAP, insofar as they affect our consolidated
financial statements are discussed below. The following table reconciles results as reported under Canadian GAAP with those that would
have been reported under United States GAAP: 2004
    
    
    2003
    
    
    2002Year ended December 31
    
    
    
    
    
    (Restated)
    
    
    (Restated)Net earnings (loss)  Canadian GAAP
    
    $
    612
    
    
    $
    153
    
    
    $
    (1,477
    )Increased post-retirement benefits expense (a)
    
    
    (39
    )
    
    
    (37
    )
    
    
    (23
    )Unrealized currency translation losses on Voiseys Bay project
deferred income and mining tax liabilities (b)
    
    
    (81
    )
    
    
    (207
    )
    
    
    (49
    )Increased intangible assets amortization expense (c)
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Increased research and development expense (d)
    
    
    (17
    )
    
    
    (5
    )
    
    
    (6
    )Decreased (increased) exploration expense (e)
    
    
    1
    
    
    
    (4
    )
    
    
    (3
    )Decreased (increased) asset impairment charges (f)
    
    
    11
    
    
    
    
    
    
    
    (961
    )Increased interest expense (g)
    
    
    (26
    )
    
    
    (25
    )
    
    
    (9
    )Unrealized net gain (loss) on derivative instruments (h)
    
    
    5
    
    
    
    (1
    )
    
    
    5Increased income and mining tax expense (i)
    
    
    
    
    
    
    (15
    )
    
    
    Decreased (increased) minority interest (d) (e) (f)
    
    
    (8
    )
    
    
    1
    
    
    
    2Change in accounting policy (j)
    
    
    
    
    
    
    
    
    
    
    1Taxes on United States GAAP differences
    
    
    21
    
    
    
    30
    
    
    
    144Net earnings (loss) before cumulative effect of a change
in accounting principle  United States GAAP
    
    
    479
    
    
    
    (112
    )
    
    
    (2,378
    )Cumulative effect of a change in accounting principle (j)
    
    
    
    
    
    
    (17
    )
    
    
    (2
    )Net earnings (loss)  United States GAAP
    
    $
    479
    
    
    $
    (129
    )
    
    $
    (2,380
    )Other comprehensive income (loss) (l):Reclassification of net gain on derivatives
designated as cash flow hedges (h)
    
    
    (6
    )
    
    
    (21
    )
    
    
    (19
    )Reclassification to earnings of net gain on
derivatives due to ineffectiveness (h)
    
    
    (9
    )
    
    
    (8
    )
    
    
    Changes in fair value of derivatives designated
as cash flow hedges (h)
    
    
    25
    
    
    
    5
    
    
    
    26Unrealized gains on long-term investments (k)
    
    
    11
    
    
    
    68
    
    
    
    17Long-term investments reclassifications (k)
    
    
    
    
    
    
    (18
    )
    
    
    24Marketable securities reclassifications (k)
    
    
    
    
    
    
    
    
    
    
    (1
    )Minimum additional pension liability adjustment (a)
    
    
    (105
    )
    
    
    (125
    )
    
    
    (318
    )Taxes on other comprehensive income (loss)
    
    
    11
    
    
    
    68
    
    
    
    102Other comprehensive loss  United States GAAP (l)
    
    
    (73
    )
    
    
    (31
    )
    
    
    (169
    )Comprehensive income (loss)  United States GAAP (l)
    
    $
    406
    
    
    $
    (160
    )
    
    $
    (2,549
    )Net earnings (loss) per share  Basic (m)Net earnings (loss) per share before cumulative effect of a
change in accounting principle  United States GAAP
    
    $
    2.55
    
    
    $
    (0.72
    )
    
    $
    (13.15
    )Cumulative effect of a change in accounting principle (j)
    
    
    
    
    
    
    (0.09
    )
    
    
    (0.01
    )Net earnings (loss) per share  Basic (m)
    
    $
    2.55
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )Net earnings (loss) per share  Diluted (m)Net earnings (loss) per share before cumulative effect of a
change in accounting principle  United States GAAP
    
    $
    2.32
    
    
    $
    (0.72
    )
    
    $
    (13.15
    )Cumulative effect of a change in accounting principle (j)
    
    
    
    
    
    
    (0.09
    )
    
    
    (0.01
    )Net earnings (loss) per share  Diluted (m)
    
    $
    2.32
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )
 170




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(a) Post-retirement benefits For Canadian reporting purposes, we amortize the excess of the net actuarial gains and losses
over 10 per cent of the greater of the post-retirement benefits obligation and the fair value of
plan assets over the expected average remaining service life of our employee group. For United
States reporting purposes, we amortize all actuarial gains and losses systematically over the
expected average remaining service life of employees. United States GAAP also requires the recognition of a minimum additional pension liability in
the amount of the excess of the unfunded accumulated benefits obligation over the recorded pension
benefits liability; an offsetting intangible pension asset is recorded equal to the unrecognized
prior service costs, with any difference recorded as a reduction in accumulated other comprehensive
income. At December 31, 2004, the minimum additional pension liability would have been $1,141
million (2003  $1,042 million; 2002  $900 million) and the intangible pension asset would have
been $78 million (2003  $84 million; 2002  $67 million), resulting in a $668 million reduction,
after taxes, (2003  $581 million; 2002  $523 million) in accumulated other comprehensive income. (b) Unrealized currency translation gains (losses) on Voiseys Bay project deferred income and
mining tax liabilities In the second quarter of 2004, for United States GAAP reporting purposes we revised our
accounting treatment for unrealized non-cash currency translation gains and losses arising from the
translation into U.S. dollars, at the end of each period, of certain Canadian dollar-denominated
deferred income and mining tax liabilities established in 1996 upon the acquisition of the Voiseys
Bay deposits. We have concluded that, under United States GAAP, such currency translation gains
and losses should be included in the determination of earnings. Previously, these unrealized
non-cash currency translation gains and losses had been deferred and included in property, plant
and equipment as part of development costs for the Voiseys Bay project until operations were to
commence. The impact of this revision, which has been accounted for retroactively by restating
prior period results, was an increase in the unrealized currency translation losses of $81 million
for 2004 (2003  $207 million; 2002  $49 million). The deficit at the beginning of 2004 has been
increased by $171 million to reflect the cumulative impact of the revision to December 31, 2003. (c) Intangible assets Previously, we reported that, under United States GAAP, mineral rights were intangible assets
with respect to balance sheet classification. During the second quarter of 2004, for United States
GAAP the Emerging Issues Task Force (EITF) of the FASB released Issue No. 04-2 which reached the

decision that mineral rights should be reported as tangible assets and disclosed as a separate
component of property, plant and equipment. A FASB staff position paper dated April 30, 2004 also
validated this change by means of amendments to Statement of Financial Accounting Standards (SFAS)
Nos. 141 and 142. As a result of this change, we have reclassified, for United States GAAP
purposes, intangible assets of $2,469 million from intangible assets to property, plant and
equipment. We have also, effective January 1, 2004, ceased amortization of the residual value of
intangible assets referred to in our 2003 Annual Report on Form 10-K, as amended. (d) Research and development expense Under Canadian GAAP, development costs are deferred and amortized if the development project
meets certain generally accepted criteria for deferral and amortization. In addition, fixed assets
including equipment may be acquired or constructed in order to provide facilities or carry out a
research and development project. The use of such assets will extend over a number of accounting
periods and, accordingly, are capitalized and amortized over their useful lives. Under United
States GAAP, research and development costs are charged to expense in the period incurred. (e) Exploration expense Under Canadian GAAP, capitalized exploration expenditures are classified under property, plant
and equipment with the related mineral claim. For United States GAAP, exploration expenditures are
not capitalized unless proven and probable reserves have been established by a feasibility study. 171




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(f) Asset impairment charges Under United States GAAP, when the net carrying value of a long-lived asset exceeds the future
undiscounted cash flows expected to result from the use and eventual disposition of the asset, the
excess over its fair value is charged to earnings. Prior to 2003, under Canadian GAAP, when the
net carrying value of a long-lived asset exceeded the future undiscounted cash flows expected to
result from the use and eventual disposition of the asset, the excess over its net recoverable
amount was charged to earnings. In addition, financing costs are excluded from the evaluation of a
long-lived asset for impairment purposes under United States GAAP whereas such costs were
previously included under Canadian GAAP. For United States reporting purposes, in 2002, the
non-cash asset impairment charges would have been $2,148 million, net of deferred income and mining
taxes of $915 million, in respect of the reduction in the carrying value of the Voiseys Bay
project and $55 million, net of income and mining taxes of $5 million, in respect of the reduction
in the carrying value of certain property, plant, equipment and other assets. Fair value was
estimated using discounted probability-weighted expected net cash flows and a risk-free interest
rate. For United States segment reporting purposes, pre-tax charges of $3,063 million and $60
million would be included in the development projects and finished products segments, respectively. Net earnings for 2004 under Canadian GAAP included an asset impairment charge in the amount of
$201 million before income and mining taxes and minority interest. Reference is made to Note 4
above. This charge included the write-off of certain capitalized costs which, in accordance with
(d) above, were previously expensed for United States GAAP purposes. In addition, it included an
adjustment to reduce minority interest to nil. For United States GAAP, the asset impairment charge
would decrease by $11 million. The adjustment to reduce minority interest to nil would also be
adjusted with a corresponding increase to minority interest expense of $7 million. (g) Convertible debt Under Canadian GAAP, substantially all of our convertible debt is classified as an equity
instrument. The convertible debt accretes over their respective terms to their value at maturity
through periodic after-tax charges to retained earnings. Under United States GAAP, the convertible
debt would be accounted for as debt and, accordingly, accretion charges and amortization of debt
issuance costs would be recorded as interest expense. For United States GAAP, the convertible debt
would be classified as current debt in the 12month periods in advance of their special conversion
dates and as longterm debt during the remainder of their term. (h) Derivative instruments Under United States GAAP, all derivatives, whether designated in hedging relationships or not,
are required to be recorded in the balance sheet at fair value. A derivative must be designated in
a hedging relationship in order to qualify for hedge accounting. These standards include a
determination of what portions of hedges are deemed to be effective versus ineffective. In
general, a hedging relationship is effective when a change in the fair value of the derivative is
offset by an equal and opposite change in the fair value of the underlying hedged item. In
accordance with these standards, effectiveness tests are performed in order to assess effectiveness
and quantify ineffectiveness for all designated hedges. At December 31, 2004, we had outstanding
fair value hedges and cash flow hedges. A fair value hedge is a hedge of the change in the fair
value of an asset, liability or firm commitment. If a derivative is designated as a fair value
hedge, changes in the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. A cash flow hedge is a hedge of the exposure in
variability in expected future cash flows that is attributable to a particular risk such as a
forecasted purchase or sale. If a derivative is designated as a cash flow hedge, the effective
portions of the changes in the fair value of the derivative are recorded in other comprehensive
income and are recognized in earnings when the hedged item affects earnings. Ineffective portions
of changes in the fair value of the derivatives designated as hedges are recognized in earnings.
Under Canadian GAAP, we continue to recognize gains and losses on derivative contracts in income
concurrently with the recognition of the transactions being hedged. The requirements for
documentation and effectiveness testing, however, are substantially the same under both Canadian
and United States GAAP. LME forward nickel contracts are used to hedge the effect of fluctuations in the price of
nickel with respect to sales of Inco-source nickel to customers for delivery three or more months
in the future. These LME forward nickel contracts have been designated as fair value hedges in
connection with firm sale commitments. For the year ended December 31, 2004, a loss of $0.1
million was charged to net sales due to the ineffectiveness of such outstanding fair value hedges
and a gain/loss of $nil was charged to other income, net due to hedged firm commitments no longer
qualifying as a fair value hedge. At December 31, 2004, we had two interest rate swaps intended to
manage the interest rate risk associated with a portion of our fixed-rate debt, which have been
designated as fair value hedges. The interest rate swap changes our exposure to the change in fair
value of certain debt by effectively converting a 172




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portion of our fixed-rate debt to/from a floating rate. We also had an interest rate swap
outstanding to manage the variability in cash flows associated with changes in interest rates on a
floating rate term loan, which has been designated as a cash flow hedge. Depending on market conditions, we enter into precious metals fixed price swap and option
contracts and nickel option contracts with various financial counterparties who must meet certain
established criteria. These contracts, which have been designated as cash flow hedges, are
intended to provide certain minimum price realizations in respect of a portion of forecasted sales.
We have also entered into forward currency contracts to hedge a portion of the future construction
costs of our planned production facilities in New Caledonia, the Province of Newfoundland and
Labrador and at our Ontario operations that will be denominated in currencies other than the U.S.
dollar. In addition, we have also entered into fuel oil swaps to manage the cost of a portion of
our energy requirements in Indonesia. For the year ended December 31, 2004, we recognized a net
gain of $3 million in other income which represented the total ineffectiveness of our outstanding
cash flow hedges. A gain of $9 million was credited to the charge for Goro project suspension
costs due to hedged forecasted cash flows no longer qualifying as a cash flow value hedge. At
December 31, 2004, $16 million of deferred net gains on derivative instruments recorded in other
comprehensive income are expected to be reclassified to net sales during the next 12 months. The
maximum term over which cash flows are hedged is 36 months. We also purchase and sell metals and foreign currencies which have not been specifically
identified as hedges. With respect to metals, we use forward contracts to manage the price risk
associated with copper, gold and purchases of nickel and copper from third parties to meet our
customers requirements. With respect to foreign currencies, by virtue of our international
operations, we conduct business in a number of foreign currencies other than the U.S. dollar. Our
primary exchange risk is to changes in the value of the Canadian dollar, the currency in which a
substantial portion of our costs are incurred, relative to the U.S. dollar. The impact of this
risk is reduced by entering into forward contracts and foreign currency options which typically do
not extend beyond one year. At December 31, 2004, unrealized net gains in respect of derivative
instruments which were not specifically designated as hedges or not qualifying for hedge accounting
under United States GAAP amounted to $2 million. (i) Income and mining taxes As discussed in (f) above, there is a difference in the carrying value of the Voiseys Bay
project due to the impairment charge in 2002. Under both Canadian and United States GAAP, deferred
income and mining taxes are recorded at the expected rate of reversal. In 2003, there was a change
in tax rates in the jurisdiction of the Voiseys Bay project. The impact of this change in tax
rates is different for Canadian and United States GAAP due to the temporary difference created by
the asset impairment charge. (j) Asset retirement obligations Effective January 1, 2003, we adopted, for United States reporting purposes, SFAS No. 143,
Accounting for Asset Retirement Obligationsand CICA 3110, Asset Retirement Obligations, which are
substantially identical. Under SFAS No. 143, asset retirement obligations are recognized when
incurred and recorded as liabilities at fair value. The liability is accreted over time through
periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the
assets carrying value and depreciated over either the straight line method and the
units-of-production method assuming estimated proven and probable ore reserves depending on the
nature of the asset being retired. The cumulative effect of adopting SFAS No. 143 was an increase
to our deficit of $17 million, or 10 cents per share, in 2003, which is shown as a cumulative
effect of a change in accounting principle. As at January 1, 2003, property, plant and equipment
increased by $39 million, deferred income and mining taxes decreased by $11 million, and asset
retirement obligations increased by $67 million. For Canadian GAAP, financial results of
comparative periods have been restated. (k) Investments United States accounting standards for equity investments, which are set forth in SFAS No.
115, require that certain equity investments not held for trading be recorded at fair value with
unrealized holding gains and losses excluded from the determination of earnings and reported as a
separate component of other comprehensive income. At December 31, 2004, deferred charges and other
assets would have increased by $80 million (2003  $69 million; 2002  $19 million) and accumulated
other comprehensive loss would have decreased by $80 million (2003  $69 million; 2002  $19
million) before taxes. (l) Comprehensive income United States accounting standards for reporting comprehensive income are set forth in SFAS
No. 130. Comprehensive income represents the change in equity during a reporting period from
transactions and other events and circumstances from non-owner sources. Components of
comprehensive income include items such as net earnings (loss), changes in the fair value of
investments not 173




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held for trading, minimum pension liability adjustments, derivative instruments and certain
foreign currency translation gains and losses. (m) Earnings (loss) per share The computation of basic and diluted earnings (loss) per share under United States GAAP was as
follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Basic earnings (loss) per share computationNumerator:Net earnings (loss)
    
    $
    479
    
    
    $
    (129
    )
    
    $
    (2,380
    )Dividends on preferred shares
    
    
    
    
    
    
    (6
    )
    
    
    (26
    )Premium on redemption of preferred shares
    
    
    
    
    
    
    (15
    )
    
    
    Net earnings (loss) applicable to common shares
    
    $
    479
    
    
    $
    (150
    )
    
    $
    (2,406
    )Denominator:Weighted-average common shares outstanding (thousands)
    
    
    187,550
    
    
    
    184,500
    
    
    
    182,830Basic earnings (loss) per common share
    
    $
    2.55
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )Diluted earnings (loss) per share computationNumerator:Net earnings (loss) applicable to common shares
    
    $
    479
    
    
    $
    (150
    )
    
    $
    (2,406
    )Dilutive effect of:Convertible debentures
    
    
    8
    
    
    
    
    
    
    
    Net earnings (loss) applicable to common shares,
assuming dilution
    
    $
    487
    
    
    $
    (150
    )
    
    $
    (2,406
    )Denominator:Weighted-average common shares outstanding (thousands)
    
    
    187,550
    
    
    
    184,500
    
    
    
    182,830Dilutive effect of:Convertible debentures
    
    
    17,440
    
    
    
    
    
    
    
    Stock options
    
    
    1,426
    
    
    
    
    
    
    
    Warrants
    
    
    3,740
    
    
    
    
    
    
    
    Weighted-average common shares outstanding,
assuming dilution
    
    
    210,156
    
    
    
    184,500
    
    
    
    182,830Diluted earnings (loss) per common share
    
    $
    2.32
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )
 At December 31, 2004, convertible debt which is convertible into nil Common Shares
(2003 
17,440,696; 2002  9,705,111), options on nil Common Shares (2003  4,572,605; 2002  7,476,506),
Preferred Shares convertible into nil Common Shares (2003  nil; 2002  11,277,868) and Warrants
exercisable for nil Common Shares (2003  11,023,064; 2002  11,023,497) were excluded from the
computation of diluted earnings (loss) per Common Share because their effects were not dilutive. 174




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(n) Stock-based compensation We adopted a new accounting standard of the CICA in respect of stock-based compensation in
2003. This new standard is substantially identical to United States GAAP. For further
information, reference is made to Note 2(e). Had we elected to recognize the cost of our
stock-based compensation based on the estimated fair value of stock options granted, our United
States GAAP proforma results would have been as follows: Year ended December 31
    
    2002Pro forma net loss
    
    $

    (2,384
    )Pro forma net loss per common shareBasic
    
    $
    (13.18
    )Diluted
    
    $
    (13.18
    )
 The fair value of each stock option granted is estimated on the date of grant using an option
pricing model with the assumptions noted in Note 19. (o) Preferred shares For United States reporting purposes, the Preferred Shares Series E would be excluded from
shareholders equity in the Consolidated Balance Sheet. 175




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The following tables compare results reported under Canadian GAAP with those that would have
been reported under United States GAAP, together with the cumulative effect on balance sheet
accounts. Quarterly results are unaudited. Restatements in respect of Canadian GAAP are discussed
in Note 2. Canadian GAAP
    United States GAAP2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Year ended December 31
    
    
    
    
    
    (Restated)
    
    
    (Restated)Net earnings (loss)First quarter
    
    $
    255
    
    
    $
    33
    
    
    $
    12
    
    
    $
    261
    
    
    $
    (55
    )
    
    $
    5Second quarter
    
    
    (14
    )
    
    
    64
    
    
    
    (1,581
    )
    
    
    (2
    )
    
    
    (278
    )
    
    
    (2,504
    )Third quarter
    
    
    148
    
    
    
    (23
    )
    
    
    93
    
    
    
    64
    
    
    
    (35
    )
    
    
    128Fourth quarter
    
    
    223
    
    
    
    79
    
    
    
    (1
    )
    
    
    156
    
    
    
    239
    
    
    
    (9
    )Year
    
    $
    612
    
    
    $
    153
    
    
    $
    (1,477
    )
    
    $
    479
    
    
    $
    (129
    )
    
    $
    (2,380
    )Net earnings (loss) per common shareBasic
    
    $
    3.22
    
    
    $
    0.68
    
    
    $
    (8.24
    )
    
    $
    2.55
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )Diluted
    
    $
    2.99
    
    
    $
    0.66
    
    
    $
    (8.24
    )
    
    $
    2.32
    
    
    $
    (0.81
    )
    
    $
    (13.16
    )
 Canadian GAAP
    United States GAAP2004
    
    
    2003
    
    

2002
    
    
    2004
    
    
    2003
    
    
    2002December 31
    
    
    
    
    
    (Restated)
    
    
    (Restated)Assets:Accounts receivable
    
    
    601
    
    
    
    435
    
    
    
    251
    
    
    
    636
    
    
    
    474
    
    
    
    289Property, plant and equipment
    
    
    7,580
    
    
    
    7,033
    
    
    
    6,401
    
    
    
    6,444
    
    
    
    3,500
    
    
    
    3,092Intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,467
    
    
    
    2,469Deferred charges and other assets
    
    
    569
    
    
    
    319
    
    
    
    208
    
    
    
    320
    
    
    
    256
    
    
    
    141Liabilities:Long-term debt due within one year
    
    
    107
    
    
    
    103
    
    
    
    97
    
    
    
    107
    
    
    
    92
    
    
    
    97Other accrued liabilities
    
    
    399
    
    
    
    332
    
    
    
    210
    
    
    
    405
    
    
    
    369
    
    
    
    217Long-term debt
    
    
    1,551
    
    
    
    1,409
    
    
    
    1,546
    
    
    
    2,194
    
    
    
    2,035
    
    
    
    1,781Deferred income and mining taxes
    
    
    1,879
    
    
    
    1,706
    
    
    
    1,350
    
    
    
    1,291
    
    
    
    1,115
    
    
    
    872Post-retirement benefits
    
    
    671
    
    
    
    603
    
    
    
    475
    
    
    
    1,532
    
    
    
    1,522
    
    
    
    1,304Asset retirement obligations
    
    
    171
    
    
    
    141
    
    
    
    119
    
    
    
    171
    
    
    
    141
    
    
    
    52Minority interest
    
    
    529
    
    
    
    442
    
    
    
    385
    
    
    
    527
    
    
    
    432
    
    
    
    376Shareholders equity:Convertible debt
    
    
    619
    
    
    
    606
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    Retained earnings (deficit)
    
    
    397
    
    
    
    (206
    )
    
    
    (331
    )
    
    
    (665
    )
    
    
    (1,144
    )
    
    
    (994
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (589
    )
    
    
    (516
    )
    
    
    (485
    )
 176




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##### Table of Contents



Changes in retained earnings and accumulated other comprehensive loss under United States GAAP were as follows: Year ended December 31
    
    2004
    
    
    2003
    
    
    2002Retained earnings (deficit) at beginning of year
    
    $
    (1,144
    )
    
    $
    (994
    )
    
    $
    1,412Net earnings (loss)
    
    
    479
    
    
    
    (129
    )
    
    
    (2,380
    )Preferred dividends
    
    
    
    
    
    
    (6
    )
    
    
    (26
    )Premium on redemption of preferred shares
    
    
    
    
    
    
    (15
    )

    
    
    Retained earnings (deficit) at end of year
    
    $
    (665
    )
    
    $
    (1,144
    )
    
    $
    (994
    )Accumulated other comprehensive loss at beginning of year
    
    $
    (516
    )
    
    $
    (485
    )
    
    $
    (316
    )Other comprehensive loss
    
    
    (73
    )
    
    
    (31
    )
    
    
    (169
    )Accumulated other comprehensive loss at end of year
    
    $
    (589
    )
    
    $
    (516
    )
    
    $
    (485
    )
 177




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Recent Accounting Pronouncements Effective January 1, 2006, we will adopt, for United States reporting purposes, SFAS No. 151,
Inventory Costs  An Amendment of ARB No. 43, Chapter 4. Under SFAS No. 151, abnormal amounts of
idle facility expense, freight, handling costs and spoilage should be recognized as current period
charges. We do no anticipate that the application of SFAS No. 151 will have a material impact on
our results of operation. Effective January 1, 2005, on a retroactive basis, we will adopt revisions to SFAS No. 128,
Earnings Per Share. The revisions relate primarily to (1) the use of year to date weighted average
prices when applying the treasury stock method and (2) if an instrument can be settled in cash or
shares, an entity should assume that the instrument will be settled in shares, if share settlement
is more dilutive. Currently, with respect to our LYON Notes, we presume cash settlement and
therefore, this instrument is not considered in the calculation of diluted earnings per share. The
impact of adopting these revisions will be a decrease in diluted earnings per share for the year
ended December 31, 2004 of 10 cents per share (2003  nil; 2002  nil). For United States GAAP reporting purposes only, effective December 31, 2004, we retroactively
adopted EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per
Share. This abstract addresses the issue of when the dilutive effect of contingently convertible
debt instruments should be included in diluted earnings per share. The EITF reached a consensus
that all shares issuable upon conversion of contingently convertible debt securities should be
included in diluted earnings per share computations regardless of whether the market price trigger
or other contingent features for conversion have been met. Previously, the dilutive effect of
contingently convertible debt securities were included in diluted earnings per share computations
if the conditions under which such debt securities are convertible into common shares have been
met. We currently have two issues of contingently convertible debt securities outstanding to which
the new abstract applies, our Convertible Debentures due 2023 and our
3 1/2% Subordinated Convertible
Debentures due 2052 (See Note 15). The concepts of EITF 04-8 have not yet been adopted for
Canadian GAAP purposes and represents a Canadian-U.S. GAAP difference for 2004. In December 2003, the FASB issued FASB Interpretation 46(R), Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51(FIN-46) to be effective for financial
statements issued after December 31, 2003. FIN-46 provides a new framework for identifying
variable interest entities (VIEs) and determining when a company should include the assets,
liabilities, non-controlling interests and results of operations of a VIE in its consolidated
financial statements. In general, a VIE is a corporation, partnership, limited liability
corporation or any other legal structure used to conduct activities or hold assets that either (1)
has insufficient equity to carry out its principal activities without additional subordinated
financial support, (2) has a group of equity owners that are unable to make significant decisions
about its activities, or (3) has a group of equity owners that do not have the obligation to absorb
losses or the right to receive returns generated by its operations. FIN-46 requires a VIE to be
consolidated if a party with an ownership, contractual or other financial interest in the VIE (a
variable interest holder) is obligated to absorb a majority of risk of loss from the VIEs
activities, is entitled to receive a majority of the VIEs residual returns (if no party absorbs
the majority of the VIEs losses), or both. A variable interest holder that consolidates the VIE
is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIES assets, liabilities and non-controlling interests and
subsequently account for the VIE as if it were consolidated based on majority voting interest. The
effect of adopting the provisions of FIN-46 is to increase assets and liabilities by approximately
$41 million as at December 31, 2004. Reference is made to Note 14 to Consolidated Financial
Statements for further information. 178




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##### Table of Contents



SCHEDULE VIII INCO LIMITED AND SUBSIDIARIES
VALUATION ACCOUNTS AND RESERVES
(in thousands) Additions
    
    
    DeductionsBalance at
    
    
    Charged to
    
    
    For Accounts
    
    
    BalanceBeginning
    
    
    Costs and
    
    
    Receivable
    
    
    at Endof Year
    
    
    Expenses
    
    
    Written Off
    
    
    of YearYear ended December 31, 2004Allowance for doubtful accounts
    
    $
    15,406
    
    
    $
    7
    
    
    $
    14,542
    
    
    $
    871
 Year ended December 31, 2003Allowance for doubtful accounts
    
    $
    17,456
    
    
    $
    636
    
    
    $
    2,686
    
    
    $
    15,406
 Year ended December 31, 2002Allowance for doubtful accounts
    
    $
    3,875
    
    
    $
    13,619
    
    
    $
    38
    
    
    $
    17,456
 179




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SUPPLEMENTAL FINANCIAL INFORMATION Quarterly Financial Information First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year(in millions of United States dollars except per share amounts)2004Net sales
    
    $
    1,094
    
    
    $
    992
    
    
    $
    1,031
    
    
    $
    1,161
    
    
    $
    4,278Net earnings (loss)
    
    $
    255
    
    
    $
    (14
    )
    
    $
    148
    
    
    $
    223
    
    
    $
    612Net earnings (loss) per common shareBasic
    
    $
    1.35
    
    
    $
    (0.09
    )
    
    $
    0.78
    
    
    $
    1.17
    
    
    $
    3.22Diluted
    
    $
    1.26
    
    
    $
    (0.09
    )
    
    $
    0.73
    
    
    $
    1.06
    
    
    $
    2.992003 (Restated)(1)Net sales
    
    $
    593
    
    
    $
    599
    
    
    $
    450
    
    
    $
    832
    
    
    $
    2,474Net earnings (loss)
    
    $
    33
    
    
    $
    64
    
    
    $
    (23
    )
    
    $
    79
    
    
    $
    153Net earnings (loss) per common shareBasic
    
    $
    0.06
    
    
    $
    0.34
    
    
    $
    (0.13
    )
    
    $
    0.42
    
    
    $
    0.68Diluted
    
    $
    0.05
    
    
    $
    0.34
    
    
    $
    (0.13
    )
    
    $
    0.38
    
    
    $
    0.66
   (1)  Reference is made to Note 2 to the financial statements under Item 8 of this Report. 180




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures Managements Report on Internal Control over Financial Reporting and the Report of the
Independent Registered Public Accounting Firm thereon are set forth in Item 8 of this Report. As of the end of the period covered by this Report, an evaluation was carried out by Incos
management, with the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
U.S. Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that these disclosure controls and procedures were effective as
of the end of the period covered by this Report. In addition, no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the U.S. Securities Exchange Act of
1934) occurred during the fourth quarter of our fiscal year ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. 181




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of Inco Limited The information under Election of Directors,
Information Regarding the Board and Board
Committees Board Committees, and Audit Committee Report in Incos Proxy Circular and Statement
dated February 18, 2005 (the 2005 Proxy Statement), filed as Exhibit 99 hereto, is incorporated
herein by reference to such information. Reference is also made to Executive Officers of Inco
Limited above. Inco has adopted a Code of Ethics for Financial Personnel governing its senior officers and
employees with financial reporting and related responsibilities and has posted such code on its web
site, www.inco.com. Within the time period required by the SEC and the New York Stock Exchange, we
will post on our website any amendment to the Code of Ethics for Financial Personnel and any waiver
applicable to our senior financial officers and our executive officers or directors. We have also
posted on our website the Board of Directors Guidelines on Corporate Governance and the charters
of our Audit Committee, Corporate Governance and Nominating Committee, Management and Resources and
Compensation Committee, Pension Committee, Environment, Health and Safety Committee and Capital
Projects Committee. Any of the foregoing documents are available in print upon request of any
shareholder to our investor relations personnel through our website or by telephone at (416)
361-7670. 
 Item 11. Executive Compensation The information under Executive Compensation, Report on Executive Compensation and
Comparative Shareholder Return in the 2005 Proxy Statement is incorporated herein by reference to
such information. Reference is also made to Executive Officers of Inco Limited above. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management 
 Security Ownership of Certain Beneficial Owners and Management The information under Ownership of Securities in the 2005 Proxy Statement is
incorporated herein by reference to such information. Reference is also made to Executive
Officers of Inco Limited and Securities Authorized for Issuance under Equity Compensation Plans
above. 
 Changes in Control There are no arrangements known to Inco the operation of which may at a subsequent date
result in a change of control of the Company. 
 Item 13. Certain Relationships and Related Transactions None. 
 Item 14. Principal Accountant Fees and Services The information under Auditors Fees in the 2005 Proxy Statement is incorporated herein
by reference to such information. 182




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)1.
    
    
    
    
    
    
    
    List of Financial Statements
Included under Item 8 of this Report
Auditors ReportConsolidated Statement of EarningsConsolidated Statement of Retained EarningsConsolidated Balance SheetConsolidated Statement of Cash FlowsNotes to Consolidated Financial StatementsSupplementary Financial Information (unaudited)(a)2.
    
    
    
    
    
    
    
    List of Financial Statement
Schedules included under Item 8 of this Report
Schedule VIII  Valuation accounts and reserves(a)3.
    
    
    
    
    
    
    
    Exhibits(3)
    (i)
    
    
    
    Restated Articles of Incorporation of Inco Limited dated May 7, 2004
(incorporated by reference to Exhibit 3.1 to the Companys Originally
Filed Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2004)(ii)
    
    (a)
    
    General By-law No. 1 of Inco Limited as amended to February 3, 2004
(incorporated by reference to Exhibit 3(ii)(a) to the Companys Annual
Report on Form 10-K for the year ended December 31, 2003)(b)
    
    Standing Resolution of Inco Limited as amended to February 3, 2004
(incorporated by reference to Exhibit 3(ii)(b) to the Companys Annual
Report on Form 10-K for the year ended December 31, 2003)(4)
    (i)
    
    (a)
    
    Reference is made to(3)(i) and (ii) above(b)
    
    Warrant Agreement dated December 1, 2000 among Inco Limited, CIBC Mellon
Trust Company and ChaseMellon Shareholder Services LLC, as Canadian and
U.S. Warrant Agents, respectively (incorporated by reference to the
Registration Statement on Form F-10 (File No. 333-12748) as filed with
the Commission on December 7, 2000)(c)
    
    Shareholder Rights Plan Agreement dated as of September 14, 1998, as
amended and restated as of April 20, 2005, between Inco Limited and CIBC
Mellon Trust Company, as Rights Agent (incorporated by reference to
Exhibit A to the 2005 Proxy Statement attached as Exhibit 99 to this
Report on Form 10)(ii)
    
    
    
    Inco Limited hereby agrees to furnish to the Commission a copy of any
instrument relating to outstanding long-term debt of the Company upon
request of the Commission(10)
    
    
    (a)
    
    Voiseys Bay Development Agreement dated as of September 30, 2002 among
Her Majesty the Queen in Right of Newfoundland and Labrador, Voiseys Bay
Nickel Company Limited and Inco Limited (incorporated by reference to
Exhibit 99(i) to the Companys Current Report on Form 8-K dated October
7, 2002)(b)
    
    Voiseys Bay Industrial and Employment Benefits Agreement dated as of
September 30, 2002 among Her Majesty the Queen in Right of Newfoundland
and Labrador, Voiseys Bay Nickel Company Limited and Inco Limited
(incorporated by reference to Exhibit 99(ii) to the Companys Current
Report on Form 8-K dated October 7, 2002)(c)
    
    2002 Non-Employee Director Share Option Plan (incorporated by reference
to Exhibit B to Inco Limiteds 2002 Proxy Statement filed as Exhibit 99
to the Companys Annual Report on Form 10-K for the year ended December
31, 2001)(d)
    
    2005 Key Employees Incentive Plan (incorporated by reference to Exhibit A
to the 2005 Proxy Statement attached as Exhibit 99 to this Report on Form
10)(e)
    
    2001 Key Employees Incentive Plan (incorporated by reference to Exhibit A
to Inco Limiteds 2001 Proxy Statement filed as Exhibit 99 to the
Companys Annual Report on Form 10-K for the year ended December 31,
2000)(f)
    
    1997 Key Employees Incentive Plan (incorporated by reference to Exhibit A
to Inco Limiteds 1997 Proxy Statement filed as Exhibit 99 to the
Companys Annual Report on Form 10-K for the year ended December 31, 1996
(File No. 1-1143))(g)
    
    1993 Key Employees Incentive Plan (incorporated by reference to the
Prospectus in Registration Statement No. 33-71298)
 183




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##### Table of Contents



(h)
    
    1998 Non-Employee Director Share Ownership Plan (incorporated by reference to Exhibit 10(g) to Inco Limiteds Annual
Report on Form 10-K for the year ended December 31, 2001)(i)
    
    Forms of two Agreements, each dated as of between March 23, 1998 and
December 3, 2002 between certain executive officers of Inco Limited (all
executive officers in the case of the form of Agreement referred to in
(2) below and S.M. Hand, R.C. Aelick S.F. Feiner, P.J. Goudie, F.S.
Hakimi, P.C. Jones and L. Kruger in the case of the form of Agreement
referred to in (1) below) and Inco Limited covering severance payments
and continuation of certain benefits in the event of (1) involuntary
termination of employment (except for cause) or resignation under certain
circumstances not wholly voluntary or (2) involuntary termination of
employment (except for cause) or resignation under certain circumstances
not wholly voluntary within two years following a change in control (as
defined in such agreements) (incorporated by reference to Exhibit
10(iii)(A) to Inco Limiteds Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998 (File No. 1-1143))(j)
    
    Description of Inco Limiteds Management Incentive Plans (incorporated by
reference to the first paragraph under Management Incentive Plans in
the 2005 Proxy Statement)(k)
    
    Electricity Supply Agreement dated October 28, 2004 between Enercal S.A. and Goro Nickel
S.A. relating to the supply of electricity by Enercal to Goro Nickel for
the Goro project.(l)
    
    Lease Agreement dated December 30, 2004 between GNiFi as lessor and Goro
Nickel S.A. as lessee under which GNiFi will lease to Goro Nickel S.A. a
portion of the Goro project processing plant which is financed under
French tax legislation (the Girardin Act).(m)
    
    Construction Agreement dated December 30, 2004 between GNiFi as owner and
Goro Nickel S.A. as project manager under which Goro Nickel S.A. has been
appointed as construction agent on behalf of GNiFi to purchase, construct
and commission a portion of the Goro project processing plant which is
financed under French tax legislation (the Girardin Act).(n)
    
    Contract of Work between the
Government of the Republic of Indonesia and P.T. International Nickel
Indonesia Tbk, consisting of (i) Agreement on Modification and Extension
of 1968 Contract of Work dated January 15, 1996; (ii) Contract
of Work dated as of July 27, 1968, and (iii) Memorandum of
Understanding dated January 15, 1996 Relating to Agreement on
Modification and Extension of 1968 Contract of Work dated
January 15, 1996.(21
    )
    
    
    
    Subsidiaries of Inco Limited(23
    )
    
    
    
    Consents of Lawrence B. Cochrane, Robert A. Horn, Robert C. Osborne, S.
Nicholas Sheard and Olivier Tavchandjian, each as a Qualified Person
named in this Report pursuant to National Instrument 43-101 issued by the
Canadian Securities Administrators(24
    )
    
    (a)
    
    Powers of Attorney(b)
    
    Resolution of the Board of Directors(31
    )
    
    
    
    Rule 13a-14(a)/15d-14(a) Certifications(32
    )
    
    
    
    Section 1350 Certifications(99
    )
    
    
    
    2005 Proxy Statement
 184




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##### Table of Contents



Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Toronto, Ontario, on the 14th day of March, 2005. INCO LIMITED
(Registrant)By:
    
    (Signed) STUART F. FEINERStuart F. FeinerExecutive Vice-President,General Counsel & Secretary
 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report
has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated on the 14th day of March, 2005. Signature
    
    Title(Signed) SCOTT M. HAND
    
    Chairman and Chief Executive Officerand DirectorScott M. Hand
    
    (Principal Executive Officer)(Signed) FAROKH S. HAKIMI
    
    Executive Vice-President andChief Financial OfficerFarokh S. Hakimi
    
    (Principal Financial Officer)(Signed) RONALD A. LEHTOVAARA
    
    Vice-President and Comptroller(Principal Accounting Officer)Ronald A. Lehtovaara
 185




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##### Table of Contents



Signature
    
    Title*GLEN A. BARTON
    
    Director(Glen A. Barton)*ANGUS A. BRUNEAU
    
    Director(Angus A. Bruneau)*RONALD C. CAMBRE
    
    Director(Ronald C. Cambre)*JANICE K. HENRY
    
    Director(Janice K. Henry)*CHAVIVA M. HOEK
    
    Director(Chaviva M. Hoek)*PETER C. JONES
    
    Director(Peter C. Jones)*JOHN T. MAYBERRY
    
    Director(John T. Mayberry)*DAVID P. OBRIEN
    
    Director(David P. OBrien)*ROGER PHILLIPS
    
    Director(Roger Phillips)*JAMES M. STANFORD
    
    Director(James M. Stanford)(Signed) EDWARD A. STEEN
    
    Authorized Representative in theUnited StatesEdward A. SteenInternational Nickel, Inc.Park 80 West, Plaza TwoSaddle Brook, NJ 07663
   *  

 Pursuant to powers of attorney executed by the directors named above whose names are preceded by
an asterisk, Stuart F. Feiner, as attorney-in-fact, does hereby sign this Report on behalf of each
of such directors, in each case in the capacity of director, on the 14th day of March, 2005. (Signed) STUART F. FEINERStuart F. Feiner, attorney-in-fact
 186




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##### Table of Contents



Consent of Independent
Auditors We hereby consent to the incorporation by reference the Registration Statements on Form S-3 (Nos. 33-22435 and 33-50816), on Form S-8 (Nos.
33-71298, 333-7798, 333-13714 and 333-98601) and on Form F-10 (Nos. 333-13470, 333-12588,
333-104688 and 333-104687) of Inco Limited of our report dated February 14, 2005 relating to the
financial statements, the financial statement schedule, managements assessment of the
effectiveness of internal control over financial reporting and the effectiveness of internal
control over financial reporting which appears in this Annual Report on Form 10-K. We also consent
to the reference to us under the heading Experts in each
such Registration Statement on Form S-3 and Form F-10. PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
March 14, 2005 187




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##### Table of Contents



INCO LIMITED EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004 Exhibit No.
    
    Exhibit10
    (k)
    
    

Electricity
Supply Agreement dated October 28, 2004 between Enercal S.A. and Goro
Nickel S.A relating to the supply of electricity by Enercal to
Goro Nickel for the Goro project10
    (l)

    
    
    Lease Agreement dated December 30, 2004 between GNiFi as
lessor and Goro Nickel S.A. as lessee under which GNiFi will
lease to Goro Nickel a portion of the Goro project processing
plant which is financed under French tax legislation (the
Girardin Act)10
    (m)
    
    
    Construction Agreement dated December 30, 2004 between GNiFi
as owner and Goro Nickel S.A. as project manager under which
Goro Nickel has been appointed as construction agent on behalf
of GNiFi to purchase, construct and commission a portion of
the Goro project processing plant which is financed under
French tax legislation (the Girardin Act)10
    (n)
    
    
    Contract of Work between the
Government of the Republic of Indonesia and P.T. International Nickel
Indonesia Tbk, consisting of (i) Agreement on Modification and Extension
of 1968 Contract of Work dated January 15, 1996; (ii) Contract
of Work dated as of July 27, 1968, and (iii) Memorandum of
Understanding dated January 15, 1996 Relating to Agreement on
Modification and Extension of 1968 Contract of Work dated
January 15, 1996.21
    
    
    
    Subsidiaries of Inco Limited23
    
    
    

Consent
of Independent Auditors23
    
    
    
    Consents of Lawrence B. Cochrane, Robert A. Horn, Robert C.
Osborne, S. Nicholas Sheard and Olivier Tavchandjian, each as
a Qualified Person named in this Report pursuant to National
Instrument 43-10124
    (a)
    
    
    Powers of Attorney24
    (b)
    
    
    Resolution of the Board of Directors of the Registrant31
    
    
    
    Rule 13a-14(a)/15d-14(a) Certifications32
    
    
    
    Section 1350 Certifications99
    
    
    

    Proxy Circular and Statement dated February 18, 2005
1
   1
    Portions of the Proxy circular and Statement are incorporated by reference in Part III of this Report.